Crypto Coalition Unveils Plan to Mitigate Aave Token Exploit

A $300 million shortfall typically doesn't come with a straightforward solution. However, DeFi United, a coalition of blockchain projects and crypto ecosystem individuals, is attempting to devise a step-by-step plan to rectify the situation. The proposal, which has been shared on Aave's official X account, outlines a coordinated effort to utilize Aave's infrastructure and unwind the damage caused by the Kelp DAO hack. The hack, which occurred on April 18, exploited a vulnerability in rsETH's bridge, resulting in the creation of 116,500 rsETH tokens without proper backing. These tokens were subsequently dispersed across multiple wallets and deployed in various DeFi applications, with a significant portion being used as collateral on Aave and other lending platforms. As a result, protocols like Aave found themselves holding collateral that was not fully backed, creating a systemic issue. According to the proposal, approximately 107,000 of the exploited rsETH tokens remain tied up in active positions on Aave and Compound. To address this, DeFi United's plan aims to restore the backing of rsETH and unwind the loans created using the exploited tokens. The coalition claims to have secured sufficient ETH commitments to fully re-collateralize rsETH and plans to introduce this ETH into the system in stages, converting it to rsETH and depositing it back into the system. Simultaneously, the plan focuses on the lending markets where the damage is most pronounced. Rather than allowing the situation to unfold chaotically, the proposal suggests carefully unwinding the mess. This involves dealing with the positions the attacker opened on Aave, which are essentially loans backed by rsETH that should not have existed. The plan proposes temporarily adjusting the valuation of rsETH within the system to enable the closure of these bad positions in a more controlled manner. As these positions are unwound, the underlying assets, such as ETH, can be recovered. The proposal estimates that this could release approximately 13,000 ETH from Aave alone. Once the collateral is recovered, it will be converted into ETH and used to cover the shortfall created by the exploit. Although the process carries risks, it represents a more coordinated response than DeFi has often managed in the past. If executed as intended, the ultimate goal is to fully restore the backing of rsETH and stabilize all affected markets.