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Aave risk manager models 2 bad debt scenarios from Kelp DAO exploit
TL;DR
Aave's risk management provider has modeled two bad debt scenarios following a $293 million exploit of Kelp DAO. The incident could significantly impact Aave's ecosystem depending on how losses are allocated.
Key points
- Aave's risk management provider modeled two bad debt scenarios
- Kelp DAO exploit involved a theft of $293 million
- Exploit could lead to significant impacts on Aave's ecosystem
- Contagion risk in DeFi highlighted by the incident
- Nearly $10 billion in value has left Aave since the exploit
Mentioned in this story
AaveKelp DAO
Restaked ETHwrapped Ether
Decentralized lending platform Aave’s risk management provider has outlined two scenarios on how bad debt from the Kelp DAO exploit over the weekend could impact the ecosystem, depending on how the losses are allocated.
The incident began on Saturday when hackers stole 116,500 Kelp DAO Restaked ETH (rsETH) tokens worth $293 million from Kelp DAO’s LayerZero-powered bridge and used them as collateral on Aave V3 to borrow wrapped Ether (wETH).
On Monday, LlamaRisk modeled two possible scenarios for how this “bad debt” could materialize on Aave, noting that the final decision rests with Kelp DAO.
The incident highlights the contagion risk in DeFi, where a single bridge exploit can trigger liquidity crunches and mass withdrawals across interconnected protocols like Aave, which has seen nearly $10 billion in value leave the protocol since the Kelp DAO exploit took place.
Source: Aave
Two scenarios and potential paths forward
The first scenario would see losses spread across all rsETH token holders on Ethereum mainnet and Ethereum layer 2s, resulting in roughly $123.7 million of bad debt on Aave while risking a 15% depeg in rsETH relative to Ether (ETH).
LlamaRisk said this first scenario would spread losses more thinly across all chains, while noting that wrapped Ether (wETH) would be “absorbing the bulk in absolute terms but barely noticing it relative to its reserve depth.”
Aave could also use its Umbrella security model to cover losses in wETH under the first scenario, noting that 18,922 Aave Wrapped ETH (aWETH) tokens worth nearly $43.7 million have entered the unstaking cooldown phase.
The second scenario would shift the entire shortfall to Ethereum layer 2 networks, such as and Mantle. However, the bad debt would be significantly higher at $230.1 million.
Q&A
What happened in the Kelp DAO exploit and how much was stolen?
Hackers stole 116,500 Kelp DAO Restaked ETH tokens worth $293 million from Kelp DAO's bridge.
How could the Kelp DAO exploit affect Aave's ecosystem?
The exploit could lead to bad debt scenarios on Aave, impacting liquidity and potentially triggering mass withdrawals.
What is the contagion risk in DeFi highlighted by the Kelp DAO incident?
The incident shows how a single exploit can create liquidity issues across interconnected DeFi protocols like Aave.
