The fallout from the two hundred ninety three million dollar exploit involving KelpDAO on April eighteen has left Aave, rsETH holders, and the broader decentralized finance space facing a major financial gap with no clear resolution.
On Sunday, 0xngmi, co founder of DeFiLlama, presented three practical scenarios and analyzed the potential impact of each.
Three Imperfect Options on the Table
The first approach involves distributing the losses among KelpDAO users. Under this model, users would face an estimated eighteen point five percent reduction in holdings. Around six hundred sixty six thousand sETH is currently deployed across Aave, with many positions operating near their maximum loan to value ratio, meaning they are close to liquidation.
Eliminating all equity in these positions would result in roughly two hundred sixteen million dollars in bad debt. Aave’s Umbrella ETH coverage could absorb about fifty five million dollars, while its treasury might cover another eighty five million dollars. This would still leave a shortfall of approximately seventy six million dollars. To bridge that gap, Aave could either take on debt or sell part of its treasury holdings, including AAVE tokens valued at about fifty one million dollars.
The second option presents a more severe outcome, as it would involve imposing losses on rsETH holders on layer two networks. This scenario would leave Aave with around three hundred fifty nine million dollars in rsETH supply. If those positions are fully leveraged, it could generate as much as three hundred forty one million dollars in bad debt across lending markets. Since Umbrella coverage would not apply here, Aave would need to decide which markets to support and which to abandon, with networks like Arbitrum, Mantle, and Base likely facing the heaviest impact.
The third option is technically appealing but difficult to execute. It would involve reverting to a state before the hack and compensating only directly affected users. This would require repaying about one hundred twenty four million dollars taken from Aave and an additional eighteen million dollars from Arbitrum. However, tracking and isolating funds has become complicated due to how assets have moved across multiple pooled protocols since the incident.
Adding another perspective, Yishi, founder of OneKey, proposed negotiating with the attacker. He suggested offering a bounty of ten to fifteen percent in hopes of recovering most of the funds before taking more drastic measures. If negotiations fail, he argued that LayerZero should bear a significant portion of the losses due to its role and long term interest in maintaining the ecosystem.
How the Attack Unfolded
Meir Dolev, founder of Cyvers, reconstructed the timeline of the attack using on chain data. The attacker’s wallet was funded through Tornado Cash about ten hours before the exploit.
At seventeen thirty five UTC on April eighteen, two key transactions occurred in quick succession. The first involved a verification step on LayerZero, followed just twenty four seconds later by a second transaction that drained one hundred sixteen thousand five hundred sETH, worth approximately two hundred ninety three point five million dollars.
KelpDAO responded at eighteen twenty three UTC by blacklisting the attacker’s address, successfully preventing a second attempt that could have drained an additional one hundred million dollars.
According to Dolev, the root cause was a weak bridge configuration. KelpDAO’s bridge between Unichain and Ethereum required only a single verification to release funds. By forging that verification, the attacker was able to move the entire amount.
LayerZero later stated that the attack was linked to the Lazarus Group and its TraderTraitor unit. The company emphasized that its protocol functioned as intended but pointed to KelpDAO’s use of a single verification setup as the key vulnerability, noting it had previously advised partners to adopt more secure configurations.
Security researcher Andy criticized the design choice, describing it as highly irresponsible given that the protocol held around one point five billion dollars in user funds. He also warned that many other projects are currently operating with similar setups, exposing them to comparable risks.#crypto#cryptonews https://coinsignals.net https://t.me/coinsignalpublic
