TLDR
- Kelp DAO exploiter’s rsETH holdings on Ethereum and Arbitrum have been liquidated by Aave
- Liquidated assets transferred to Recovery Guardian, a multisignature wallet operated by DeFi United
- Recovery fund now approximately 10% away from securing sufficient ETH to completely restore rsETH backing
- Legal complications keep 30,765 ETH frozen by Arbitrum DAO after US law firm submits restraining notice
- Aave’s TVL has rebounded from $14.2B to surpass $15B threshold
The decentralized lending protocol Aave has successfully liquidated all remaining rsETH positions controlled by the Kelp DAO exploiter across both Ethereum and Arbitrum networks. This action represents a significant milestone in DeFi United’s collaborative recovery initiative aimed at restoring full backing to rsETH and compensating impacted users.
Collateral from the liquidation has been sent to the Recovery Guardian, a multisignature wallet under DeFi United’s management. Aave emphasized that the liquidation process did not impact user funds and did not require activation of its Umbrella insurance system.
The exploit, which occurred on April 18, involved an attacker—believed to have connections to North Korean actors—who exploited Kelp DAO’s LayerZero-integrated bridge to illegitimately create 116,500 unbacked rsETH tokens on Ethereum. These fraudulent tokens were subsequently deployed as collateral on DeFi lending platforms like Aave and Compound to extract wrapped Ether.
The security breach resulted in over $190 million in uncollateralized debt for Aave and sparked significant capital flight from the protocol. Total value locked plummeted by approximately $12 billion during the seven days after the incident.
Aave implemented a governance proposal to temporarily modify the rsETH oracle pricing to execute the liquidations. This adjustment created an undercollateralized state in the attacker’s positions, enabling liquidation procedures. The oracle configuration has been reverted to standard parameters.
DeFi United has accumulated contributions surpassing $320 million. Galaxy Digital’s vice president of research, Thaddeus Pinakiewicz, stated the fund requires approximately 10% additional ETH to fully bridge the outstanding gap.
Legal Battle Complicates Recovery
A complicating factor has emerged that delays the recovery timeline. Arbitrum DAO approved freezing 30,765 ETH linked to the attack, intending to allocate it to DeFi United. However, Gerstein Harrow LLP, a US law firm, submitted a restraining notice last Friday attempting to prevent the transfer.
The legal firm seeks to claim the frozen ETH as restitution connected to terrorism-related court judgments against North Korea. Aave has countered by filing an emergency motion requesting the restraining notice be vacated.
Arbitrum DAO governance participants continue voting on releasing the funds to DeFi United, with more than 90% supporting the release. The voting period concludes on Friday.
Waiting on Stablecoin Commitments
DeFi United remains in discussions for formal commitments from major stablecoin providers Circle, Ethena, and Frax, alongside Ink, the Kraken-developed Ethereum layer 2 solution.
Pinakiewicz said these commitments are needed to “get it over the line and plug the hole.”
Aave’s total value locked demonstrates stabilization trends. According to DefiLlama metrics, the protocol has recovered from its April 26 bottom of $14.2 billion to exceed $15 billion in recent trading sessions.
Outflows from Aave’s lending markets have moderated throughout the past week. Friday’s conclusion of the Arbitrum DAO governance vote represents a critical juncture for determining whether the recovery strategy can achieve full execution.
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