TLDR
- Aave executed liquidations on the Kelp DAO exploiter’s rsETH collateral across Ethereum and Arbitrum networks
- Liquidated assets were transferred to Recovery Guardian, a multisig controlled by DeFi United
- Recovery fund now sits approximately 10% away from fully replenishing rsETH collateralization
- Arbitrum DAO’s frozen 30,765 ETH remains inaccessible following legal restraining notice from US law firm
- Protocol’s total value locked rebounds from $14.2B floor to surpass $15B threshold
The lending protocol Aave has successfully liquidated all outstanding rsETH collateral positions belonging to the Kelp DAO exploiter across both Ethereum mainnet and Arbitrum. This action represents a crucial milestone in the DeFi United community initiative aimed at restoring proper backing to rsETH tokens and compensating victims of the security breach.
All liquidated assets have been routed to the Recovery Guardian wallet, a multi-signature address operated by DeFi United. Aave emphasized that the liquidation process had zero impact on legitimate user deposits and that the protocol’s Umbrella insurance reserve remained untouched.
The exploit, which occurred on April 18, involved a sophisticated attack believed to be connected to North Korean threat actors. The perpetrator exploited vulnerabilities in Kelp DAO’s LayerZero bridge infrastructure to illegitimately create 116,500 rsETH tokens on Ethereum without proper backing. These fraudulent tokens subsequently served as collateral for borrowing wrapped Ether across multiple DeFi lending platforms, including Aave and Compound.
The security breach saddled Aave with over $190 million in uncollateralized debt and sparked significant user withdrawals. In the immediate aftermath, the protocol experienced a dramatic decline in total value locked, shedding nearly $12 billion within seven days of the incident.
Executing the liquidations required Aave to implement a governance-approved temporary modification to the rsETH oracle pricing mechanism. This adjustment artificially created an undercollateralized state in the attacker’s positions, triggering the liquidation threshold. Following completion of the liquidation process, the oracle configuration was reverted to standard operating parameters.
DeFi United has successfully accumulated more than $320 million in contributions to date. Galaxy Digital’s vice president of research, Thaddeus Pinakiewicz, indicated that the fund currently requires approximately 10% additional ETH to completely eliminate the collateral shortfall.
Legal Battle Complicates Recovery
A complicating factor has emerged that threatens to delay full recovery. Arbitrum DAO participants approved a proposal to freeze 30,765 ETH linked to the attack for eventual transfer to DeFi United. However, this plan hit a roadblock when Gerstein Harrow LLP, a United States law firm, submitted a restraining notice last Friday aimed at preventing the asset transfer.
The legal firm is pursuing custody of the frozen ETH as compensatory damages connected to terrorism-related court judgments against North Korea. Aave has countered by submitting an emergency legal motion seeking to nullify the restraining notice.
Arbitrum DAO governance participants continue deliberating on authorizing the fund release to DeFi United, with approval support exceeding 90%. The voting period concludes this Friday.
Waiting on Stablecoin Commitments
DeFi United remains in discussions with several major crypto entities awaiting formal pledges. These include stablecoin providers Circle, Ethena, and Frax, as well as 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 encouraging signs of recovery. According to DefiLlama analytics, the protocol has rebounded from its April 26 nadir of $14.2 billion to eclipse the $15 billion mark in recent trading sessions.
Net capital outflows from Aave’s lending markets have substantially moderated throughout the past week. Friday’s conclusion of the Arbitrum DAO governance vote represents a pivotal juncture that could determine whether the comprehensive recovery strategy achieves its objectives.
Get 3 Free Stock Ebooks
Discover top-performing stocks in AI, Crypto, and Technology with expert analysis.
- Top 10 AI Stocks - Leading AI companies
- Top 10 Crypto Stocks - Blockchain leaders
- Top 10 Tech Stocks - Tech giants
