Aave Lays Out Technical Fix to Address rsETH Bad Debt Overhang

Author | Azuma (@azuma_eth) Aave's rsETH-related bad debt episode, which has dragged on for more than a week, is moving toward resolution. DeFi United says it has now raised enough capital to support the fix; as of publication, commitments total 132,704 ETH, worth about $302 million. Aave published its technical implementation plan on April 28 at noon, aiming to repair rsETH collateral conditions and bring markets back to normal. Odaily note: Prior coverage includes "DeFi Again Stolen $292 Million—Is Aave No Longer Safe?", "The ThreeWay博弈 Under a $290 Million Hole: Who Will Pay Up—Aave, L0, or Kelp?", and "Aave Is Handing Over the Throne of DeFi Lending Due to Its Own Foolishness". Background The key issue is no longer the mechanics of Kelp DAO's 116,500 rsETH loss, but what happened after the attacker took control. The hacker split 116,500 rsETH across multiple addresses. Part 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. A smaller remainder moved through other routes. Seven hacker-linked addresses still maintain active rsETH collateral positions on Aave and Compound, holding roughly 107,000 rsETH of the original 116,500. Plan and objectives Aave's plan targets two outcomes: (1) restore rsETH's collateral backing; (2) unwind affected lending-market positions on Aave and Compound to recover about 107,000 rsETH in overcollateralized assets and repair market damage. 1) Restoring rsETH collateral backing Aave describes rsETH as currently insolvent: while the underlying staked ETH remains intact, the attacker extracted value via collateralized borrowing, creating a shortfall that pushed rsETH off its peg. To restore backing, Aave says the rsETH/ETH exchange rate needs to return to 1:1.07. DeFi United is expected to drive this step using pledged ETH, subject to governance approval, execution timing, and the signing of relevant agreements. If approved, DeFi United will replenish backing by depositing ETH into the rsETH bridge lockup contract (RSETH_OFTAdapter 0x85d456b2…98ef3). The proposed sequence: - Convert DeFi United's ETH into rsETH in batches - Transfer rsETH into the relevant staking contract - Re-enable the bridge system so it can safely resume full operations LayerZero and Kelp DAO plan to add further security measures to harden the bridge after restoration. 2) Clearing abnormal lending positions Once rsETH backing is restored, Aave expects bad debt to be eliminated in principle because collateral value should again exceed borrowed value. Even so, abnormal hacker-linked positions still need to be cleared to normalize operations, with an estimated recovery of 13,000 ETH. Aave plans to submit sequential governance proposals on Ethereum and Arbitrum to run a "controlled liquidation process." Steps outlined: - Temporarily adjust the rsETH oracle price to enable efficient liquidations - Accept a temporary shortfall during settlement, to be covered in later steps - Transfer redeemed rsETH collateral to a DeFi United-managed multisig Aave says these parameter changes are strictly temporary and will be rolled back after completion, with no long-term effect on the protocol. During the process, deposits of WETH and rsETH will remain frozen across Ethereum mainnet, Arbitrum, Base, Mantle, and Linea. Target end state: restore the rsETH price oracle; redeem recovered rsETH for ETH through Kelp DAO's standard redemption path; use the resulting ETH to cover deficits in Aave's Ethereum and Arbitrum markets. For Compound, Aave expects a similar cleanup approach. With liquidity support from DeFi United, the effort is projected to recover an additional ~16,776 ETH. Open questions and risks Aave says the proposal is designed to resolve the situation without socialized losses, but flags several uncertainties: - Even with sufficient ETH commitments, deployment hinges on final agreements and governance approval - Position cleanup depends on governance proposals passing and being executed smoothly - If the attacker actively interferes, losses may not be fully realized, potentially requiring additional liquidation actions - LayerZero and Kelp have rolled out added safeguards, but residual risk remains until validated in production The "Kelp DAO hack and Aave bad debt" episode appears close to conclusion, though the real test will be execution. As Andy, founder of The Rollup, put it: "The next few days are crucial for DeFi—tasks are daunting and must be completed both quickly and securely. This is not only a technical challenge but also a test of social coordination. It truly feels surreal to witness these developments in real time." For now, the market is watching whether the proposed fix plays out as intended.