Decentralized lending platform Aave’s danger administration supplier has outlined two eventualities on how dangerous debt from the Kelp DAO exploit over the weekend might influence the ecosystem, relying on how the losses are allotted.
The incident started on Saturday when hackers stole 116,500 Kelp DAO Restaked ETH (rsETH) tokens price $293 million from Kelp DAO’s LayerZero-powered bridge and used them as collateral on Aave V3 to borrow wrapped Ether (wETH).
On Monday, LlamaRisk modeled two potential eventualities for the way this “dangerous debt” might materialize on Aave, noting that the ultimate determination rests with Kelp DAO.
The incident highlights the contagion risk in DeFi, the place a single bridge exploit can set off liquidity crunches and mass withdrawals throughout interconnected protocols like Aave, which has seen practically $10 billion in worth leave the protocol for the reason that Kelp DAO exploit happened.
Two eventualities and potential paths ahead
The primary state of affairs would see losses unfold throughout all rsETH token holders on Ethereum mainnet and Ethereum layer 2s, leading to roughly $123.7 million of dangerous debt on Aave whereas risking a 15% depeg in rsETH relative to Ether (ETH).
LlamaRisk stated this primary state of affairs would unfold losses extra thinly throughout all chains, whereas noting that wrapped Ether (wETH) could be “absorbing the majority in absolute phrases however barely noticing it relative to its reserve depth.”
Aave might additionally use its Umbrella safety mannequin to cowl losses in wETH beneath the primary state of affairs, noting that 18,922 Aave Wrapped ETH (aWETH) tokens price practically $43.7 million have entered the unstaking cooldown part.
The second state of affairs would shift your entire shortfall to Ethereum layer 2 networks, akin to Decision and Mantle. Nevertheless, the dangerous debt could be considerably larger at $230.1 million.
LlamaRisk additionally famous that Aave has round $181 million in its treasury that may very well be used to deal with a possible dangerous debt shortfall.
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On Monday, Kelp DAO said it’s nonetheless assessing the monetary influence of the exploit and how one can safely unpause the protocol, including that it’s working with Aave, LayerZero and different stakeholders on a path ahead.
Kelp DAO sheds extra mild on the exploit
Kelp DAO additionally shared extra particulars concerning the incident, saying that two nodes tied to the LayerZero bridge have been compromised, whereas a 3rd was hit with a distributed denial-of-service assault.
The attacker solid a seemingly legitimate switch message that the system authorized, permitting 116,500 rsETH to be minted on one among LayerZero’s bridges.
Kelp stated it paused all related contracts on Ethereum and Ethereum layer 2s and blacklisted all wallets tied to the exploiter shortly after, stopping them from stealing one other 40,000 rsETH price $95 million.
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