Aave Under Strain as KelpDAO Exploit Disrupts DeFi Lending Markets

• KelpDAO exploit moved 116,500 rsETH, enabling over $200M in ETH borrowing on Aave.
• Liquidity dropped as users withdrew funds and stablecoin supply caps were reached.
• Recovery plans may split losses between Ethereum holders or Layer 2 users.

A large-scale exploit involving KelpDAO’s rsETH bridge has placed pressure on decentralized lending markets, with activity on Aave and Compound drawing attention to liquidity conditions and potential exposure.

Data shared by Arkham shows that the incident enabled an attacker identified as Lazarus Group to access and redeploy a large portion of rsETH, triggering withdrawals and disrupting normal market operations.

Exploit Triggered Through LayerZero Verification Flow

According to on-chain data, the attacker extracted 116,500 rsETH from KelpDAO’s bridge adapter by submitting a forged message to LayerZero verifiers. As a result, the bridge contract released rsETH on Ethereum without a valid transfer, increasing the token’s effective supply on the network.

Further details indicate that the tokens were not newly created but sourced from existing cross-chain reserves. These reserves had been distributed across networks such as Arbitrum, Mantle, and Base. The exploit, therefore, shifted previously bridged liquidity back to Ethereum, concentrating supply in a single environment.

Aave Liquidity Pressured as Borrowing Spikes

After securing the rsETH, the attacker deposited it into Aave and borrowed more than $200 million in ETH. This movement reduced available liquidity and coincided with increased withdrawals by users. As participants reacted, stablecoin markets on Aave reached supply caps, leaving limited availability for USDC and USDT transactions.

At the same time, the rsETH concentration within lending platforms remained high. Data shows that roughly 87.9% of the total supply is held across Aave and Compound, with Ethereum alone accounting for the majority of Aave’s share. As liquidity tightened, rsETH also moved below its expected value, trading at approximately 82% of its original peg.

However, the situation has shifted toward resolution planning, with KelpDAO evaluating how to address the imbalance. One option is to distribute losses across all holders, which would reduce the value of rsETH across networks. Another approach would prioritize full backing for Ethereum-based holdings while allocating reduced recovery for Layer 2 users.

Related: DeFi Exploits Top $775M in 2026 as KelpDAO, Drift Lead Losses