Original Title: How the exploit of Kelp DAO on rsETH put Aave in front of its "moment of truth"
Original Author: Gianmarco Marzotto
Translator: Peggy, BlockBeats
Editor's Note: On April 18, an abnormal transfer of approximately 116,500 rsETH pushed the entire DeFi into a sudden stress test. The stolen assets flowed into Aave v3 in a short period, using WETH as collateral to borrow a significant amount, causing the originally stable lending system to come under pressure: the ETH pool utilization rate was pushed to 100%, potential bad debt reached nearly $200 million, and large-scale fund withdrawals occurred within hours, leading to a liquidity crisis.
On the surface, this was just another cross-chain bridge attack; however, the deeper issue is that it did not occur within Aave's own code but was transmitted through an "ostensibly safe" external collateral asset. The failure of rsETH in the bridging, restaking, and governance chain made it economically non-redeemable, while this change was only reflected in the lending system with a delay, ultimately evolving into a direct impact on the protocol's solvency.
This article argues that the risk structure of DeFi is undergoing a transformation. Whether a protocol is secure is no longer just a question of "Is the contract free of vulnerabilities?" but rather "Is the entire technical and governance chain behind the collateral it accepts reliable?" As liquid staking, restaking, and cross-chain infrastructure stack up, any failure in one link could be amplified through the collateral chain into a systemic shock.
In the end, this was a classic case of "yield backlash": what was once considered nearly risk-free restaking yield converted within a day into liquidity exhaustion and bad debt exposure. For Aave, this was a true test of governance and risk control; for the entire DeFi ecosystem, it served as a clearer reminder — in a highly composable system, risks never disappear; they are merely redistributed and revealed later.
Below is the original text:
Introduction: The Day rsETH Was No Longer "Zero Risk"
On April 18, 2026, DeFi experienced a moment that thoroughly distanced "theory" from "reality": the rsETH cross-chain bridge of Kelp DAO was exploited, and approximately 116,500 rsETH (equating to about $292 million to $293 million) was attacked, becoming the largest DeFi hacking event of the year so far.
The stolen tokens did not remain in place but were quickly transferred to Aave v3 as collateral and used to borrow WETH. This operation directly triggered a liquidity crisis, creating over $170 million to $200 million in bad debt within the protocol.
Unlike many previous attack incidents, this time Aave's own code was not vulnerable. The issue stemmed from "external" — a source of collateral pricing that was originally deemed reliable lost credibility in a short time.
This article will outline the specific evolution path of this incident, explaining why it resembles a liquidity crisis rather than a security vulnerability on Aave's part, and further explore what this event means for risk management in an increasingly interconnected DeFi ecosystem.
What are Kelp DAO and rsETH (and why are they sought after by Aave)
Kelp DAO is a liquid restaking protocol that allows users to convert ETH and various liquid staking tokens (such as stETH, cbETH, etc.) into a liquidity token called rsETH, which is anchored to the underlying assets restaked on EigenLayer.
Thus, the value of rsETH comes from a basket of underlying assets locked in the restaking system. Although these underlying assets have limited liquidity, rsETH can still freely circulate throughout the DeFi ecosystem, used as collateral or to participate in various yield strategies (yield farming).
From the perspective of a lending protocol like Aave (money market), rsETH is "theoretically" almost an ideal collateral: it has good collateral backing, provides an additional source of yield, and is embedded in a "blue-chip" ecosystem like EigenLayer. For this reason, rsETH was launched in Aave v3 and v4 markets, allowing users to use it as collateral to borrow more liquid assets (such as WETH).
However, this integration also brought about a shift in the risk paradigm: Aave's solvency on the ETH side is no longer solely dependent on the internal design and security of its own protocol but has begun to rely on external components — including the operational safety of cross-chain bridges and the entire restaking tech stack supporting rsETH.
Attack Path: From Kelp's Cross-Chain Bridge to Aave v3
According to preliminary on-chain analyses and reports from multiple crypto media outlets, the starting point of this incident came from Kelp DAO's rsETH cross-chain bridge based on LayerZero.
The attacker exploited a vulnerability in its cross-chain messaging mechanism (lzReceive in EndpointV2), extracting about 116,500 rsETH, corresponding to approximately $292 million to $293 million at the time of the attack.
Upon obtaining these tokens, the attack strategy was economically highly "rational":
· Deposit rsETH into Aave v3 as collateral
· Borrow as much WETH as possible based on that position (taking advantage of the fact that rsETH was still fully recognized as a valid collateral asset by the protocol)
· Transfer or liquidate the borrowed WETH to extract real liquidity value
· Leave the risk within the Aave system, waiting for the collateral value to subsequently collapse
When Kelp DAO discovered the anomaly, it swiftly announced the suspension of the rsETH contracts on the mainnet and several L2s to investigate the attack, effectively freezing the normal circulation and redemption path of rsETH.
At the same time, Aave also urgently froze the rsETH and wrsETH markets on v3 and v4, emphasizing that its smart contract itself had not been compromised, and the issue was confined to this single asset.
But the core problem is: at this time, the rsETH serving as collateral was already "ineffective" on an economic level.
The cross-chain bridge was drained, the redemption path was uncertain, and the price discovery mechanism was in chaos — yet the borrowed WETH based on its collateral still existed in reality.
Liquidity Crisis on Aave: Utilization Hits Peak with "Nine-Digit" Bad Debt
Kelp DAO's freeze on rsETH made it impossible for positions that had previously used this token as collateral to be systematically liquidated. Specifically, the WETH loans corresponding to these collateral could not recover sufficient value by disposing of rsETH, and the protocol's role as a "last liquidator" mechanism became ineffective for these positions.
Preliminary estimates show:
· Approximately 116,500 rsETH were stolen and deposited into Aave v3
· The scale of WETH loans directly related to these positions is approximately between $177 million and $236 million
· If considering linkage exposure across other protocols, the potential scale of bad debt could reach up to about $200 million
· Aave's ETH fund pool utilization rate once hit 100%, leaving almost no liquidity available for users to withdraw (unless they exit first)
Panic thus rapidly spread: within just a few hours, Aave experienced outflows exceeding $5.4 billion, among which over $150 million came from Justin Sun, one of the significant participants in the protocol.
Aave's total locked value (TVL) plunged in a very short time from about $45.8 billion to $35.7 billion, while its token AAVE dropped by about 17% to nearly 20% in a single day.
An ironic outcome was that for users lending stablecoins or other assets, yields actually surged — due to the shortage of lendable funds, the annualized yield (APY) on stablecoin deposits was pushed up to about 13%-14%, a typical signal that the market was entering "crisis mode."
Implications of This Incident for On-Chain Risk Management
The rsETH–Kelp DAO–Aave incident is not just an ordinary attack but resembles a typical case that reveals how risk is transmitted from one protocol to another in a highly composable DeFi financial system.
Several key conclusions are as follows:
Lending protocols do not exist in isolation
Even if Aave's smart contract itself was not compromised, accepting rsETH as collateral means direct exposure to external risks — including the operational safety of cross-chain bridges and the entire restaking system behind it.
When "redeemability" collapses, oracle pricing is not enough
Even if on-chain prices remain "valid" in form, once an asset loses redeemability or liquidity (due to suspension, attack, or freeze), it is no longer a qualified collateral economically. Risk management needs to incorporate infrastructure integrity and governance factors, not just price dimensions.
Emergency pause mechanisms are a double-edged sword
Kelp DAO's freeze on the rsETH contract was reasonable from the perspective of controlling the attack, but it exacerbated problems for Aave: with collateral illiquid, liquidation became more difficult.
"Decentralized collateral" may evolve into systemic risk concentration
Every new LRT, LST, or complex derivative asset introduces new sources of risk. Once these assets are simultaneously accepted as collateral by multiple protocols (such as Aave, Compound, Euler, etc.), a single cross-chain bridge attack could trigger a chain reaction throughout the entire ecosystem.
For on-chain risk managers, this incident essentially becomes a "template": the so-called "collateral whitelisting" is no longer just about evaluating price volatility but needs to assess the complexity and fragility of the entire technology supply chain supporting that asset.
Outlook: How Aave (and DeFi) May Change After the rsETH Incident
In the hours following the attack, the Aave team and Guardian reiterated that the fund pool was still operating normally, indicating that the incident was only related to rsETH assets and were cooperating with Kelp, LayerZero, and other stakeholders to minimize the impact scope.
But the real work has only just begun: how to deal with bad debt, whether to activate the Safety Module / Umbrella mechanism, and how to update asset listing strategies will all become key stress tests at the governance level.
Several directions that this event may accelerate include:
· Adopting more conservative listing parameters for LRT / cross-chain assets: Lower LTV, stricter limits, and multi-level audit requirements, along with targeted stress tests for cross-chain attack scenarios.
· Building a quantitative framework to measure "bridge risk" and "restaking stack risk," similar to current modeling of price volatility and asset correlations.
· Paying more attention to collateral concentration issues: not only setting limits per single asset but also by "risk category" (for instance, derivative assets from the same LRT provider or the same messaging infrastructure).
· Promoting the evolution of security module roles: including AAVE staking, insurance vaults, and fallback fund pools, transforming from "the last line of defense" to be part of daily systemic risk management.
For users, this incident also sends a clear signal: using complex composite tokens as collateral can indeed enhance yields, but it simultaneously means exposure to a series of often overlooked risks — including cross-chain bridge vulnerabilities, restaking governance issues, and emergency pause mechanisms of upstream protocols.
A Reminder About the Nature of DeFi Yields
The attack on rsETH did not compromise Aave's code but unveiled a critical issue: when collateral is built on top of complex liquid staking, restaking, and cross-chain bridge structures, the sensitivity of lending protocols to external shocks significantly increases.
The seemingly "risk-free" yields observed over the past few months transformed into an outflow exceeding $10 billion and a liquidity crisis triggered by potential bad debt of about $200 million within just one day.
If one were to summarize a core lesson, it would be this: in DeFi, yield is always the pricing of risk — it’s just that this risk is often underestimated until the first systemic event occurs.
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