Coalition Unveils Technical Proposal to Mitigate Aave Token Exploit

Normally, a $300 million shortfall wouldn't come with a straightforward solution. However, the group leading the Kelp DAO recovery effort is attempting to create a roadmap for restoration. DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem individuals, has devised a detailed, step-by-step plan to re-establish the backing of rsETH after this month's Kelp DAO hack sent shockwaves through DeFi lending markets, resulting in the release of over 116,000 unaccounted tokens. The proposal, shared on Aave's official X account, resembles a coordinated recovery 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, tricking the Ethereum side into releasing 116,500 rsETH by forging a legitimate message, thereby creating a large batch of rsETH without backing. These tokens were dispersed across multiple wallets and utilized throughout DeFi, with a substantial portion used as collateral on Aave and other lending platforms. This is where the issue became systemic: protocols like Aave found themselves holding collateral that was temporarily unbacked. According to the proposal, most 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. This presents two concurrent problems: restoring rsETH's backing and unwinding the loans created using the extra tokens. DeFi United's proposal aims to address both issues simultaneously. On the backing side, the group claims to have secured sufficient ETH commitments to fully re-collateralize rsETH, planning to feed the ETH back into the system in stages, converting it to rsETH, and depositing it to ensure the token is fully backed. Meanwhile, attention shifts to the lending markets where the damage is most pronounced. Rather than allowing the situation to unfold chaotically, the plan involves carefully unwinding the mess. A significant aspect of this involves dealing with the positions the attacker opened on Aave, essentially loans backed by rsETH that should not have existed. Instead of waiting for these loans to collapse, the proposal suggests intervening to close them in a more controlled manner. Temporarily adjusting rsETH's valuation within the system will enable the smooth liquidation or closure of these bad positions, allowing the recovery of underlying assets like ETH. The proposal estimates this could free up around 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, effectively filling the resulting hole. Although the process carries risks, it hinges on 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 often achieved previously. If executed as intended, the ultimate goal is clear: 'rsETH backing is fully restored, and all affected markets are stabilized,' as the proposal states.