Coalition Proposes Solution to Mitigate Aave Token Exploit

The aftermath of a $300 million exploit typically doesn't come with a straightforward repair plan. However, DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem individuals, is attempting to create one. They have devised a detailed, step-by-step proposal to restore the backing of rsETH following the Kelp DAO hack, which released over 116,000 unaccounted-for tokens into the market. This proposal, shared on Aave's official X account, resembles a coordinated recovery effort, relying heavily on Aave's infrastructure to rectify the damage and stabilize the markets. The hack, which occurred on April 18, involved an attacker exploiting a vulnerability in rsETH's bridge, resulting in the creation of 116,500 rsETH without proper backing. These tokens were dispersed across multiple wallets and utilized as collateral on Aave and other lending platforms, leading to a systemic issue where protocols like Aave held collateral that was temporarily unbacked. According to the proposal, the majority of the exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH still tied up in positions across Aave and Compound. DeFi United's plan aims to address two primary issues: restoring rsETH's backing and unwinding the loans created using the exploited tokens. To achieve this, the group has secured sufficient ETH commitments to fully re-collateralize rsETH, which will be fed back into the system in stages. Simultaneously, the plan involves carefully unwinding the damaged lending markets. This includes dealing with the positions the attacker opened on Aave, which are essentially loans backed by rsETH that should not have existed. Rather than allowing these loans to collapse chaotically, the proposal suggests a controlled unwind, involving temporary adjustments to rsETH's valuation within the system. This will enable the bad positions to be liquidated or closed more smoothly, recovering underlying assets like ETH. The proposal estimates that around 13,000 ETH could be freed up from Aave alone. Once the collateral is recovered, it will be converted into ETH and used to cover the shortfall created by the exploit. While the process carries risks, including governance approvals and the successful deployment of committed funds, the plan represents a more coordinated response than DeFi has often managed previously. If executed successfully, the ultimate goal is to fully restore rsETH's backing and stabilize all affected markets.