Coalition Unveils Technical Proposal to Mitigate Aave User Losses from Massive Token Exploit

In a rare instance, a $300 million deficit may have a potential solution. DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem individuals, has devised a meticulous, step-by-step plan to re-establish the backing of rsETH after this month’s Kelp DAO hack disrupted DeFi lending markets, releasing over 116,000 unaccounted-for tokens. The proposal, shared on Aave’s official X account, details a coordinated effort to utilize Aave’s infrastructure to rectify the damage and stabilize the markets. The incident occurred on April 18 when an attacker exploited a vulnerability in rsETH’s bridge, tricking the Ethereum side into releasing 116,500 rsETH without actual backing. These tokens were then dispersed across multiple wallets and utilized as collateral on Aave and other lending platforms, causing protocols like Aave to hold unbacked collateral. According to the proposal, most of the exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH tied up in positions across Aave and Compound. DeFi United’s proposal aims to address both the restoration of rsETH’s backing and the unwinding of loans created using the extra tokens. The group claims to have secured sufficient ETH commitments to fully re-collateralize rsETH, planning to reintroduce the ETH into the system in stages. Concurrently, the proposal focuses on the lending markets, where the damage is most pronounced, and suggests a controlled unwinding of the affected positions. This involves temporarily adjusting rsETH’s valuation within the system to facilitate the liquidation or closure of the attacker’s positions on Aave. As these positions are unwound, the underlying assets, such as ETH, can be recovered, potentially freeing up around 13,000 ETH from Aave. The proposal estimates that this collateral can be converted into ETH and used to cover the shortfall created by the exploit. Although the process carries risks, including governance approvals and the successful deployment of committed funds, it represents a coordinated response. If executed successfully, the plan aims to fully restore rsETH’s backing and stabilize the affected markets.