Aave restores liquidity after $300M backstop

Aave has restored full liquidity to its lending pools after mobilizing a $300 million industry backstop and securing a court modification that freed $71 million in frozen funds. Developers reported that depositors’ balances were preserved and lending operations resumed across the protocol.

The incident began when an attacker exploited a third-party bridge operated with Kelp and LayerZero by fabricating cross-chain messages. The attacker minted 116,500 counterfeit rsETH tokens, deposited them into Aave V3 as collateral, and immediately borrowed 82,650 wrapped ether (WETH) and 821 wrapped staked ether (wstETH). The rapid withdrawals drained core liquidity and prompted risk teams to freeze the affected markets.

Aave Labs helped organize an industry coalition including Lido, Ether.fi, Ethena and Compound that provided a $300 million recovery fund. The injected capital backstopped the compromised rsETH positions and ensured user deposits remained collateralized with authentic reserves, allowing frozen markets to be reopened.

The recovery process encountered a legal hurdle on May 1 when unrelated judgment creditors obtained a restraining notice that froze about $71 million in ethereum clawed back from the attacker. Aave filed an emergency motion on May 4 and a judge modified the freeze four days later, permitting the immediate transfer of the $71 million back into Aave’s custody. Those funds were routed into active lending pools to restore liquidity.

Developers implemented 295 parameter updates, reducing borrowing and supply caps across 168 asset pools to limit the impact of compromised assets. The protocol is also deploying an automated LTV0 circuit breaker that will set the loan-to-value for any asset to zero if its underlying cross-chain infrastructure is breached, preventing exploited tokens from being used as collateral.

Aave published a post-mortem on June 1 outlining the timeline, the technical details of the exploit and the recovery steps. The post-mortem states the industry fund and the court modification allowed a full restoration of reserves and market parameters. Aave said it will continue changes to its risk architecture to reduce reliance on third-party bridges and better protect pools from cross-chain failures.