Aave liquidates hacker rsETH on Ethereum and Arbitrum

Aave Labs liquidated the Kelp DAO attacker’s remaining rsETH positions on Ethereum and Arbitrum on Wednesday and transferred the seized collateral to Recovery Guardian, a multisignature wallet managed by DeFi United. The collateral is linked to the $293 million exploit on April 18.

Clearing the attacker’s positions released about 13,000 ETH, roughly $30.2 million at current prices. The attacker had deposited stolen rsETH as collateral to borrow wrapped Ether, creating more than $190 million in bad debt and triggering large withdrawals from Aave’s lending markets in the weeks after the exploit.

Aave posted on X that user funds were not impacted by the liquidations and that its automated insurance mechanism, Umbrella, was not used to cover the bad debt created by the attack.

Some recovery funds remain frozen. The Arbitrum DAO is holding about 30,765 ETH that is subject to a restraining notice filed by the law firm Gerstein Harrow LLP to block redistribution. Aave has filed an emergency motion asking a court to vacate that restraining notice. Members of the Arbitrum DAO are voting on whether to release the frozen ETH to the DeFi United fund; more than 90% of votes cast so far support the proposal and the vote is set to close on Friday.

Thaddeus Pinakiewicz, vice president of research at Galaxy Digital, estimated that DeFi United is “now only about 10% short of the Ether needed to restore the Kelp DAO restaked ETH (rsETH) token.” DeFi United is also seeking commitments from stablecoin issuers Circle, Ethena and Frax, and from the Kraken-built Ethereum layer 2 Ink to supply the remaining capital for full recapitalization.

Aave’s total value locked fell by nearly $12 billion within a week after the attacker used stolen rsETH as collateral, dropping to about $14.2 billion on April 26. Data from DeFi analytics platforms show net outflows have eased and Aave’s TVL has recovered above $15 billion since the liquidations.

The recovery process now hinges on the Arbitrum DAO vote, the court outcome on the restraining notice and whether outside commitments materialize to close the remaining funding gap for rsETH backing.