Aave Liquidates Kelp DAO Hacker’s rsETH Collateral on Ethereum and Arbitrum

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Aave Labs has liquidated the rsETH collateral held by the Kelp DAO attacker across Ethereum and Arbitrum, transferring the proceeds to DeFi United’s recovery multisig wallet. Galaxy Digital’s Thaddeus Pinakiewicz said Wednesday the fund remains approximately 10% short of the ETH needed to fully restore rsETH backing. 

Liquidated Collateral Transferred to DeFi United’s Recovery Multisig

Aave described the liquidations as a “critical step” in the “DeFi United” recovery plan in a post on X on Wednesday. The liquidated collateral, tied to the $293 million exploit that occurred on April 18, was transferred to Recovery Guardian, a multisignature wallet managed by DeFi United. 

Aave said user funds were not affected by the liquidations and that Umbrella, Aave’s automated insurance mechanism for bad debt protection, was not deployed during the process. The company did not specify the quantity of rsETH collateral liquidated in Wednesday’s action or the exact dollar value recovered.

Aave had previously stated on April 28 that clearing the hacker’s collateral on Ethereum and Arbitrum would release 13,000 ETH. Pinakiewicz, vice president of Galaxy Digital’s research team, said Wednesday that the recovery fund is now roughly 10% short of the total ETH required to fully plug the gap left by the exploit.

30,765 ETH Remains Frozen in Legal Dispute Involving Arbitrum DAO

Beyond the collateral already liquidated, Pinakiewicz noted that an additional 30,765 ETH frozen by Arbitrum DAO remains in what he described as “legal limbo.” U.S. law firm Gerstein Harrow LLP filed a restraining notice on Friday to block Arbitrum DAO from redistributing those funds to the DeFi United recovery pool. In response, Aave filed an emergency motion to vacate the restraining notice. The outcome of that legal dispute remains unresolved.

A vote among Arbitrum DAO members on whether to release the frozen ETH to the DeFi United fund is set to close Friday. As of Wednesday, over 90% of participating voters were in favor of the proposal. Aave and DeFi United did not specify what steps would follow if the vote passes while the restraining notice remains in effect.

DeFi United Awaits Commitments From Circle, Ethena, Frax, and Ink

In addition to the frozen funds, DeFi United is also awaiting financial commitments from stablecoin issuers Circle, Ethena, and Frax, as well as Ink, the Ethereum layer-2 network built by Kraken. 

Pinakiewicz said DeFi United is also awaiting financial commitments from Circle, Ethena, Frax, and Ink, describing them as necessary for Aave to “get it over the line and plug the hole.” None of the four named parties had publicly confirmed their commitments as of Wednesday.

Aave’s Total Value Locked Recovers Above $15 Billion After April Low

The Kelp DAO exploit triggered significant outflows from Aave’s lending markets. According to Aave, the hacker deposited stolen rsETH tokens as collateral on the platform to borrow wrapped Ether, leaving more than $190 million in bad debt and prompting a wave of withdrawals that pushed Aave’s total value locked down by nearly $12 billion in a single week. 

Data from DefiLlama shows net outflows have since eased, with Aave’s TVL climbing from a local low of $14.2 billion on April 26 to above $15 billion as of early May. Aave did not provide a target date for full recovery of its pre-exploit TVL levels.