Aave and Kelp are working on bailout options as losses keep piling up

Aave is currently locked in a tight situation in the KelpDAO hack that Cryptopolitan reported on April 18, where an attacker drained 116,500 rsETH, worth about $292 million, from Kelp’s cross-chain bridge.

Sources who have been granted anonymity reached out to Cryptopolitan and described Aave as being stuck between bad options and pressure to act.

One of those sources said Aave and Kelp were “currently working on a potential bailout independently of LayerZero,” with the “best case scenario” being that about 110k ETH would be raised to fill the gap.

Aave will take a hit in either case because there is money in both L2 and L1, and 86% of all rsETH is on Aave, so billions of dollars would be stuck if L1 is affected.

Regardless, the loss would be similar either way, with the only difference being whether it is socialized broadly or concentrated on one user segment.

Rising losses force Aave closer to a decision

Our source said Aave “can’t maintain the status quo much longer.” The same source said negative APY was costing vaults “$100k a day” and that the pressure was compounding daily. Another message said time was now working against Aave.

The source added that Aave would need to act “regardless of what Kelp or LayerZero do” because “the economics alone force a move.”

That stress is already visible inside EarnETH, as the vault has direct exposure to rsETH through a levered rsETH/ETH position on Aave worth about 9% of the vault, or roughly $21.6 million. High utilization in lending markets is also putting cost pressure on other levered positions.

The source said the situation had become a three-track problem because “there are multiple ways this could resolve.” One message said the “haircut” path was more of a late-stage fallback and had not been finalized.

Another said the “worst of the situation has likely already played out,” but added that clarity should come soon. There was also a warning that Aave did not want to use umbrella support and would rather see the issue solved if Kelp kept losses localized on Layer 2.

Lido pauses withdrawals and prepares haircut options

Meanwhile, EarnETH’s first-loss protection mechanism, funded with $3 million from the Lido DAO treasury, can be used if needed by burning the DAO’s vault shares.

Lido Finance on X said: “The outcome for the rsETH position is dependent, among other things, on decisions and actions by Kelp, LayerZero, and Aave, specifically how losses are socialized, what recovery is achieved, and how Aave resolves potential bad debt and market freezes.”

For now, deposits and withdrawals are not being processed by the vault curator, due to fair treatment for depositors and time to assess losses.

“If resolution is delayed, an alternative path will be to reopen withdrawals with the rsETH position marked to a maximum expected haircut, so depositors can exit at a known worst-case value rather than wait indefinitely,” Lido said.

Withdrawals could resume with the rsETH position marked to a maximum expected haircut, letting users exit at a known worst-case value instead of waiting forever. stETH and wstETH are not affected, and the core Lido staking protocol has no involvement in the incident.

Our source then floated a darker theory, saying the systems may have been “compromised for a long time” or that it was “an insider job,” and hinted at North Korean actors being the suspects, but of course that remained speculation.

Earlier, Cryptopolitan had reported that Layer Zero made a public statement that:

“Preliminary indicators suggest attribution to a highly-sophisticated state actor, likely DPRK’s Lazarus Group, more specifically TraderTraitor. This incident was isolated to KelpDAO’s rsETH configuration as a direct consequence of their single-DVN setup.”

L2 talks push Kelp, Aave, and Lido toward the same goal

More than one party now appears to want this mess kept on L2. Our source said if losses were localized there, there would be “no impact to Earn” apart from the negative rates piling up each day. Another message put it plainly: “So lido, aave, everyone wants L2 localised.”

That is why some private talks now sound like a fight over who takes the hit and how fast. We were told that if Kelp “rugs Aave,” the platform could “shut down right away,” and that was given as one reason an L2 approach might be taken.

The source said Kelp was likely weighing legal options. When asked whether Kelp might sue LayerZero, the reply was that LayerZero was at fault in that view, but any lawsuit would likely take months or even a year. Another message said Kelp did not have a “best” option because “every single one is bad for them.”

An ecosystem fund was being gathered and might buy time. Another questioned why anyone would fund them now unless the whole amount was achieved. Separate notes said Aave was trying to raise funds, Kelp was trying to raise funds, and there was “a lot of silence on social on all sides.” Basically, the situation is at an impasse.

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