Aave Asks NY Court to Unfreeze $71M on Arbitrum

Aave filed a memorandum Monday in a U.S. federal court in New York asking the judge to unfreeze roughly 30,766 ETH, about $71 million, that Arbitrum’s Security Council froze after an April exploit of Kelp DAO’s rsETH staking product. The company asked the court to lift the restraining order or require the plaintiffs who sought the freeze to post a bond of at least $300 million if the freeze remains in place.

The April incident involved an attacker who manipulated a cross-chain token transfer mechanism, minted fake rsETH and used those tokens to borrow about $290 million from lending markets. Arbitrum’s Security Council intervened and placed the linked ETH under governance control pending resolution.

Plaintiffs in the case hold long-standing, unpaid judgments against North Korea and contend the exploiter was likely linked to the Lazarus Group. They argue the frozen assets can be treated as property of North Korea and seized to satisfy their judgments.

Aave’s filing disputes that characterization and frames the funds as belonging to protocol users who were victims of the exploit. The filing stated that plaintiffs’ claims “may well be righteous,” but rejected using a court order to restrain and seize assets that the filing described as belonging to innocent third parties.

The filing also raised a procedural objection, questioning whether Arbitrum DAO can be treated as a legal entity that can be properly served with a restraining notice.

After the exploit, members of the Aave and Arbitrum communities and other decentralized finance projects formed a coordinated recovery effort called DeFi United. That effort raised more than $300 million from participants including ConsenSys, Lido, Compound and the Avalanche Foundation to help restore rsETH value and cover losses from the hack.

Aave told the court the freeze is complicating recovery work and increasing market stress. The company said users rushed to withdraw funds after the exploit, liquidity in key lending pools dropped and some depositors were unable to access holdings. Aave argued the frozen ETH are needed to stabilize markets and return value to affected users.

Plaintiffs’ attorneys disputed Aave’s account, writing that the restraining notice against Arbitrum DAO was not issued to aid recovery efforts and “does the opposite.”

The case raises questions about ownership of recovered on-chain assets and whether courts can divert funds gathered by blockchain communities after a hack to satisfy unrelated creditor claims. The litigation also asks whether a decentralized autonomous organization can be treated as a party in court and how courts should handle on-chain assets that have been restrained or placed under governance control.