AAVE Launches DeFi United to Fight $292M Hack Fallout

 

The Aave DAO is being asked to commit 25,000 ETH from its treasury to help close a massive funding gap left behind by the April 18 exploit of Kelp DAO's rsETH bridge, a vulnerability that drained roughly $292 million from one of DeFi's most widely-used liquid restaking products. The proposal, put forward Thursday by Aave service provider TokenLogic, would make Aave the single largest contributor to a broader coalition effort dubbed "DeFi United", a coordinated response involving some of the sector's biggest names.

 

The attack exploited a configuration flaw in Kelp's LayerZero bridge adapter, which was running a single-verifier setup. That weakness let the attacker mint 152,577 rsETH tokens that had no actual ETH backing, which were then used as collateral on Aave to borrow approximately $190 million in legitimate assets. The fallout was severe. More than $10 billion in net withdrawals hit Aave in the days following the breach, and the protocol's affected V3 deployments on Ethereum, Arbitrum, and Mantle were left sitting on bad debt that, by various estimates, lands somewhere between $123 million and $230 million, depending on how recoveries play out.

 

The Funding Gap and How It Gets Closed

At the prevailing rsETH-to-ETH ratio of 1.0696, the original shortfall came out to roughly 163,183 ETH. Since then, a series of coordinated actions have chipped away at the hole. Kelp recovered and froze tokens representing approximately 43,168 ETH in value. The Arbitrum Security Council stepped in to freeze 30,766 ETH that the attacker was still holding on that network, following input from law enforcement. Liquidating the hacker's remaining positions across Aave and Compound is expected to recover a further 14,168 ETH. That gets you to a shortfall of around 75,081 ETH, still a very large number.

 

To plug what remains, the DeFi United coalition has assembled a funding stack that combines direct donations, a credit facility, and the requested Aave treasury contribution. Public contributors including EtherFi, Lido, Ethena, Ink Foundation, BGD Labs, and several individual ecosystem participants have pledged a combined 14,570 ETH so far, with more conversations reportedly in progress. Mantle has proposed a credit facility of up to 30,000 ETH, structured with interest at Lido's rate plus 1% and a repayment term of up to 36 months. Bybit co-founder Ben Zhou said the exchange, as Mantle's largest stakeholder, would vote yes on the facility, drawing a parallel to industry support Bybit received after its own security incident. Together, those streams narrow the residual gap to approximately 30,000 ETH. The Aave treasury request covers most of that.

 

 

A Complex Recovery With Real Execution Risk

What makes this more complicated than a straightforward treasury disbursement is the mechanics of actually executing the recovery. The coalition needs to place the full 120,015 ETH into the LayerZero lockbox to restore rsETH's backing. But a significant chunk of the expected recoveries, roughly 44,787 ETH worth, are not yet liquid. They depend on the Arbitrum Security Council releasing frozen funds, and on successfully liquidating the attacker's positions on Aave and Compound. Those processes could stretch out over weeks.

 

To bridge that timing gap, the coalition is arranging a separate tranche of short-duration loans from additional ecosystem partners. The proposal also includes a notable authorization: Aave Labs would be permitted to pledge DAO assets and future protocol revenue as collateral to secure these funding arrangements. That is a significant move, and the TokenLogic proposal is candid about the risks involved, noting the recovery depends on actions outside the coalition's control, including Kelp reopening withdrawals, LayerZero reopening its bridge, and the Security Council completing its process. "This is a call to arms," the proposal states. "The path there is not risk-free."

 

What the Industry Is Saying

Aave founder Stani Kulechov has already put skin in the game, pledging 5,000 ETH personally stating that "Aave is my life's work and we're working nonstop to find the best possible outcome for users.". The response has drawn both measured optimism and pointed skepticism from across the ecosystem. Matthew Pinnock, COO at Altura DeFi, told Decrypt the effort signals that DeFi is "moving beyond isolated protocols to a more coordinated financial system," while also emphasizing that "socialised recovery methods" need to be paired with clear accountability frameworks. Georgii Verbitskii, founder of yield platform TYMIO, was more cautious, telling the publication that without concrete details on the initiative's structure, "it's difficult to expect any meaningful structural shift in DeFi." He also predicted the incident would push users and protocols toward more conservative, base-layer configurations, likely reducing appetite for wrapped products and liquid staking derivatives.

 

 

On the constructive side, Sergey Kravtsov, CEO of Papaya Finance, described the coordinated effort as "an emergent immune response of a financial system that is actually decentralized", competing protocols stepping in because letting bad debt cascade, as he put it, "would have hurt everyone."

 

Governance Process Still Underway

The proposal is currently in the community feedback phase on Aave's governance forum. If it reaches consensus, it moves to a Snapshot vote before heading to an on-chain AIP. Timing matters here. The DeFi United coalition has flagged that ETH price appreciation could make the dollar-denominated bad debt worse by the hour if governance moves slowly. A separate proposal to pause AAVE buybacks has also been floated, suggesting the DAO is bracing for a period of concentrated capital deployment.

 

For Aave, this is partly precedent-following. After the 2022 CRV short-squeeze incident left the DAO with roughly $1.9 million in bad debt, it chose to cover the shortfall rather than socialize losses among suppliers. The current situation is orders of magnitude larger, but the underlying posture is the same: the Aave DAO balance sheet is being positioned as a backstop for systemic DeFi events, at least when the protocol itself is directly exposed. Personally, it is amazing to see the DeFi community rally behind this endeavor in wake of such a monumental exploit.