Crypto Coalition Unveils Plan to Mitigate Aave Token Exploit

Typically, a $300 million shortfall doesn't come with a straightforward repair guide. However, the group leading the Kelp DAO recovery effort is attempting to create one. DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem individuals, has outlined a detailed, step-by-step plan to restore the backing of rsETH following this month's Kelp DAO hack, which released over 116,000 unaccounted tokens and disrupted DeFi lending markets. The proposal, shared on Aave's official X account, resembles a coordinated cleanup operation, relying heavily on Aave's infrastructure to rectify the damage and stabilize markets. The incident originated on April 18 when an attacker exploited a vulnerability in rsETH's bridge, forging a message that appeared legitimate and tricking the Ethereum side of the system into releasing 116,500 rsETH, thereby creating a large batch of rsETH without backing. These tokens were dispersed across multiple wallets and deployed across DeFi, with a significant portion used as collateral on Aave and other lending platforms, leading to a systemic problem where protocols like Aave held collateral that wasn't fully backed. According to the proposal, most of the exploited funds remain active, with roughly 107,000 of the original 116,500 rsETH still tied up in positions across Aave and Compound. This presents two problems to be solved simultaneously: restoring rsETH's backing and unwinding the loans created using the extra tokens. DeFi United's proposal aims to address both issues. To restore backing, the group has secured enough ETH commitments to fully re-collateralize rsETH, planning to feed this ETH back into the system in stages, converting it to rsETH, and depositing it back into the system to ensure the token is fully backed. Meanwhile, attention turns to the lending markets where the damage is most visible. Instead of allowing a chaotic outcome, the plan involves carefully unwinding the mess. A significant part of this process involves dealing with the positions the attacker opened on Aave, essentially loans backed by rsETH that shouldn't have existed. Rather than waiting for these loans to collapse, causing further market disruption, the proposal suggests temporarily adjusting rsETH's valuation within the system to enable the smooth liquidation or closure of these bad positions. As these positions are unwound, the underlying assets, such as ETH, can be recovered, potentially freeing up around 13,000 ETH from Aave alone. Once this collateral is recovered, it will be converted into ETH and used to cover the shortfall created by the exploit, effectively filling the hole left behind. The process carries risks, contingent upon governance approvals across multiple chains, the successful deployment of committed funds, and a smooth execution of the unwind. Nonetheless, the plan represents a more coordinated response than DeFi has previously achieved. If executed as intended, the ultimate goal is clear: the full restoration of rsETH backing and the stabilization of all affected markets, as outlined in the proposal.