Aave DAO Allocates 25,000 ETH to Support Kelp DAO Bridge Exploit Recovery

Aave DAO is voting to pause AAVE token buybacks to preserve liquidity while the DeFi sector addresses the fallout from the Kelp DAO bridge exploit. The DeFi United initiative has raised hundreds of millions in commitments to cover bad debt and restore economic backing for the rsETH token. Aave Labs is urging the Arbitrum community to release $71 million in frozen hacker funds to accelerate the recovery timeline for affected users. The coordinated rescue effort aims to stabilize the protocol without socializing losses among existing users.

Aave governance is currently voting on a proposal to pause AAVE token buybacks until the rsETH and Kelp DAO incident is fully resolved. This move formalizes a de facto halt that has been in place since mid-April, ensuring that protocol revenue is not diverted into buybacks while the size of the losses remains uncertain. Governance delegates argue that preserving balance sheet flexibility is critical for the DAO to participate in a coordinated response should further knock-on liquidations emerge from the rsETH shock.

In parallel, the Aave DAO has introduced a governance proposal to allocate 25,000 ETH from its treasury to support a recovery plan following the April 18, 2026, rsETH bridge incident. This fixed contribution is designed to help close the remaining deficit, which has narrowed from an initial estimate of 163,183 ETH to approximately 75,081 ETH following partial recoveries and pledged support. The initiative aligns with the broader DeFi United recovery framework, which includes protocol donations, asset freezes, and a credit facility.

The DeFi United initiative, promoted by Aave founder Stani Kulechov, has rallied significant support from major market players to stabilize the broader market. The coalition has secured pledges from Mantle, Lido, Ether.fi, and individual contributors, with total commitments exceeding the estimated shortfall to raise over $300 million. These funds are intended to cover the bad debt created when attackers exploited Kelp DAO’s LayerZero bridge, depositing unbacked collateral into Aave V3 markets.

Aave Labs has formally requested that the Arbitrum decentralized governance unfreeze $73.5 million in Ether tied to the Kelp DAO exploit. The funds, currently locked by the Arbitrum Security Council, are intended to be redirected to the DeFi United recovery initiative. Aave Labs outlined a plan for the frozen ETH to be sent to a recovery address co-managed by Aave, Kelp DAO, and security platform Certora. If approved, the funds would help restore the 1:1 backing of rsETH and support liquidity providers impacted by the hack.

The exploit originated from a breach involving a LayerZero-powered bridge, which enabled the unauthorized minting of 116,500 rsETH tokens. The attacker used these assets as collateral on Aave V3, borrowing 82,650 WETH and 821 wstETH, thereby exposing the protocol to significant bad debt. The incident triggered a severe liquidity drain, causing Aave’s total value locked to fall from around $26.4 billion to $18.6 billion.

How Will the DeFi United Rescue Plan Restore Market Confidence?

The recovery plan involves converting committed ETH into rsETH in tranches and transferring them to affected lockbox contracts. Both Kelp and LayerZero have implemented additional security measures to prevent future vulnerabilities. The coalition aims to clear impacted positions across Aave Ethereum Core and Arbitrum markets, freeing up 13,000 ETH and signaling a cautious market recovery.

DeFi United has published a technical implementation to restore full backing for rsETH, ensuring that every circulating token is fully collateralized by real Ether. This approach ensures that users who had assets withdrawn by hackers using dummy rsETH collateral will get them back in full, avoiding the need to socialize losses among protocol users. The process involves temporarily lowering the oracle price of rsETH via governance votes to facilitate controlled liquidations of the hacker’s positions.

What Are the Risks and Timelines for the Arbitrum Governance Vote?

The proposal to release the frozen ETH faces a lengthy 49-day constitutional AIP process, which includes forum review, temperature checks, and on-chain voting. Some Arbitrum delegates have warned that this timeline may be too slow for users with active Aave positions, potentially exacerbating market stress. Delegate Nicksta noted that many parties have open positions on AAVE that might run into problems if the process is not accelerated.

Arbitrum Security Council member Griff Green proposed conducting a Snapshot vote as soon as possible to confirm community intent before final execution. The proposal includes an extensive indemnification clause to protect the Arbitrum Foundation and Security Council members from legal complexities. If the Arbitrum proposal is approved, the hacker’s frozen funds would become the largest single contribution to the rescue effort.

Despite the crisis, Aave’s revenue generation has remained robust, with the protocol generating an average of $1.7 million in daily fees during the crisis week. The 100% utilization of the rsETH pool has resulted in maximum borrowing rates, allowing the protocol to generate significant revenue even under attack. However, the incident highlights the persistent weaknesses in DeFi infrastructure and the potential for isolated breaches to trigger system-wide stress.