Aave models $123.7M–$230.1M bad debt after Kelp DAO exploit

Aave’s risk manager LlamaRisk published two scenarios estimating between $123.7 million and $230.1 million in potential bad debt after attackers stole 116,500 rsETH, valued at roughly $293 million, from a LayerZero bridge tied to Kelp DAO. The theft occurred on Saturday; LlamaRisk released its models on Monday.

Two nodes connected to Kelp DAO’s LayerZero bridge were compromised, and a third node was hit with a distributed denial-of-service attack. An attacker submitted a forged transfer message that was accepted by the bridge, allowing 116,500 rsETH to be minted on one bridge. The attacker posted those tokens as collateral on Aave V3 to borrow wrapped Ether (wETH). Kelp DAO paused relevant contracts on Ethereum and layer 2 networks and blacklisted wallets linked to the exploiter, actions that the DAO reports prevented the theft of an additional roughly 40,000 rsETH, about $95 million.

LlamaRisk’s first scenario spreads losses across rsETH holders on Ethereum mainnet and layer 2 networks, resulting in about $123.7 million of bad debt on Aave. That model projects a roughly 15% depeg of rsETH relative to Ether and notes wETH would absorb most of the stress in absolute terms while remaining relatively resilient against its reserve depth. The report also points to Aave’s Umbrella security model as a potential source of coverage for wETH shortfalls and notes 18,922 aWETH tokens, worth nearly $43.7 million, are currently in an unstaking cooldown phase.

The second scenario concentrates the shortfall on Ethereum layer 2 networks such as Arbitrum and Mantle, producing a projected bad debt of $230.1 million. LlamaRisk noted Aave’s treasury holds about $181 million that could be used to address any gap, though governance would need to approve deployment.

Since the breach, the protocol has seen nearly $10 billion leave Aave, reflecting withdrawals and reduced user activity. Kelp DAO is continuing its assessment of financial impact and is coordinating with Aave, LayerZero and other stakeholders on conditions for safely unpausing contracts and next steps. The final allocation of losses will depend on governance votes and any coordinated interventions across the affected chains.