The final fix is out – the end of Aave’s bad debt saga is finally in sight.
- Core Insight: Aave and DeFi United have jointly proposed a technical solution to resolve the bad debt crisis triggered by the $290 million hack without socializing losses, by restoring rsETH collateral backing and liquidating abnormal positions.
- Key Elements:
- The hacker stole 116,500 rsETH, of which approximately 107,000 were deposited as collateral on Aave and Compound. By borrowing against them to exit, the positions became "insolvent," causing rsETH to depeg.
- The first objective is executed by DeFi United by depositing ETH (132,704 ETH has already been raised) to restore the 1:1.07 exchange rate between rsETH and ETH, thereby fixing the collateral backing.
- The second objective relies on a governance proposal to trigger a "controlled liquidation" by temporarily adjusting the oracle price, cleaning up the hacker's abnormal positions, which is expected to recover approximately 13,000–16,776 ETH.
- The recovered rsETH will be exchanged for ETH via the Kelp DAO standard process to cover the shortfalls in the Aave and Compound markets, ultimately restoring normal market conditions.
- There are risks in executing the plan, including governance approval delays, potential interference from the attacker, and unverified new security measures, but it is nearing completion.
Original by Odaily (@OdailyChina)
Author | Azuma (@azuma_eth)
The Aave bad debt saga that has been brewing for over a week is finally drawing to a close.
With DeFi United having raised sufficient funds to resolve the issue (132,704 ETH, worth approximately $302 million, as of writing), Aave officially released a technical implementation plan on April 28 at noon to restore the collateral status of rsETH and resume normal market operations.
- Odaily Note: For background, please refer to DeFi loses another $292 million; is even Aave now unsafe?; The $290 million trilemma: Aave, L0, Kelp – who pays?; Aave is foolishly surrendering its DeFi lending throne.
Background Recap
The details of how Kelp DAO lost 116,500 rsETH need no further elaboration. The key lies in the post-theft flow of the stolen funds.
After the theft, the hacker first distributed the 116,500 rsETH across multiple addresses. A portion was deposited as collateral on Aave V3 on Ethereum Mainnet to borrow WETH, another portion was bridged to Arbitrum and used as collateral on Aave there to borrow WETH, while the remaining smaller fraction was moved through different channels.
Currently, seven addresses linked to the hacker still hold active rsETH collateral positions on Aave and Compound, accounting for approximately 107,000 of the 116,500 initially stolen rsETH.
The Solution
To achieve the remediation goal, Aave has set two objectives in the proposed implementation plan. First, to restore the collateral backing for rsETH. Second, to clean up affected positions in lending markets like Aave and Compound, thereby recovering the excess collateral of approximately 107,000 rsETH and repairing market damage.
Let's start with the first objective – restoring the collateral backing for rsETH.
rsETH is currently in a state of "insolvency." Although the underlying staked ETH remains intact, the hacker has already escaped by borrowing against the collateral. This existing shortfall has caused the exchange rate between rsETH and ETH to "depeg."
Therefore, Aave stated that to restore rsETH's collateral backing, the exchange ratio between rsETH and ETH must be brought back to 1:1.07. This will be facilitated by DeFi United, which has secured sufficient committed ETH funding to restore full system operability. However, final execution still depends on governance approval, implementation timing, and the signing of relevant agreements.
If the plan proceeds smoothly, DeFi United will fully restore rsETH's collateral support by depositing ETH into the rsETH bridge lock-up contract (RSETH_OFTAdapter 0x85d456b2…98ef3). The specific process is as follows:
- Convert DeFi United's ETH into rsETH in batches;
- Transfer these rsETH into the relevant lock-up contracts;
- Enable the bridge system to safely resume and operate fully.
- LayerZero and Kelp DAO will implement additional security measures to ensure the bridge's safety post-recovery.
Now, onto the second objective – cleaning up affected positions in lending markets.
Once rsETH's collateral backing is restored, theoretically there will be no bad debt in Aave's lending market (as collateral value will exceed borrowed value). However, the several anomalous collateral positions linked to the hacker still need to be liquidated (estimated to recover 13,000 ETH) to restore normal market operations.
To this end, Aave stated it will submit governance proposals on Ethereum and Arbitrum sequentially to clean up the anomalous positions through a "controlled liquidation process." The specific resolution process is:
- Temporarily adjust the rsETH oracle price to trigger efficient liquidations;
- The liquidation process will generate temporary deficits (to be covered in subsequent steps);
- The recovered rsETH collateral will be transferred to a multi-sig address managed by DeFi United.
Aave emphasized that the above parameter adjustments are temporary measures, solely for remedial execution. All adjustments will be reverted upon completion and will not have a long-term impact on the Aave protocol. During the resolution period, WETH and rsETH deposits on Ethereum Mainnet, Arbitrum, Base, Mantle, and Linea will remain frozen.
The ideal scenario after liquidation is: the rsETH price oracle will be restored; the recovered rsETH will be converted to ETH via Kelp DAO's standard redemption process; this ETH will be used to cover Aave's deficits in its Ethereum and Arbitrum markets.
As for Compound, a similar cleanup approach will be taken. With liquidity support from DeFi United, it is estimated that an additional ~16,776 ETH can be recovered.
After both objectives are effectively completed, Aave will lift the pause and freeze status for rsETH and ETH in all affected markets, and subsequently restore loan-to-value (LTV) parameters for ETH and other assets.
Open Issues
Aave added that although the above plan is expected to achieve remediation goals without socialization of losses, several uncertainties remain.
First, despite securing sufficient ETH commitments, fund deployment still depends on final agreements and governance approvals. Second, the cleanup of affected positions relies on the smooth passage and execution of governance proposals. Third, if the attacker intentionally interferes, it could prevent the full formation of the deficit, requiring additional liquidation steps. Fourth, while LayerZero and Kelp have deployed additional security measures, residual risks remain until they are validated in a production environment.
Regardless, the "Kelp DAO Hack, Aave Bad Debt" saga that has troubled the DeFi market for some time finally appears to have an ending. What remains to be seen is whether the plan can be implemented as expected in a live environment.
As Andy, founder of The Rollup, commented: "The next few days are critical for DeFi. The task is arduous and must be executed both quickly and safely. This is not just a technical challenge, but also a test of social coordination. It feels surreal to witness all this unfold in real-time."
Hopefully, luck is on DeFi's side.
