Aave Restores WETH Borrowing After Kelp DAO Exploit Recovery

Aave users are now able to borrow against wrapped Ether on the decentralized finance protocol again, as the Kelp DAO exploit recovery plan continues to progress.

Aave founder Stani Kulechov said in an X post Sunday that the protocol restored loan-to-value (LTV) ratios for wrapped Ether (WETH) to pre-incident levels across all affected networks: Aave V3 Ethereum Core, Ethereum Prime, Arbitrum, Base, Mantle and Linea.

“The next step in the rsETH technical recovery plan has been completed with the restoration of WETH LTVs to their pre-incident levels across all affected networks. Users can now once again borrow against WETH on Aave, including through collateral and debt swaps,” Kulechov said.

The temporary freeze on WETH was a precautionary safety measure enacted in response to the exploit, according to Aave, alongside freezes on the rsETH and wrsETH reserves. However, in a governance proposal that passed on Saturday, the protocol said that given the demonstrated progress in recovery, the freeze can be “lifted now without compromising user protection.”

The development marks the final part of “Phase II” of the rsETH recovery plan, which also included restoring rsETH's backing using the Ether frozen after the exploit and donated tokens from the DeFi United coalition and allowing withdrawals.

Source: Stani Kulechov

Total value locked on Aave down after Kelp exploit

Hackers believed to be linked to North Korean state-backed actors stole 116,500 Kelp DAO Restaked Ether tokens on April 18 from Kelp DAO’s LayerZero-powered bridge, then used them as collateral on Aave V3 to borrow wrapped Ether, resulting in about $195 million in bad debt on Aave.

Total value locked (TVL) on Aave dropped by more than $8 billion following the exploit, according to DefiLlama. As of Monday, its TVL is about $14.8 billion, down from $23.5 billion in March.

Tom Wan, head of data at consulting firm Entropy Advisors, which partners with the Arbitrum DAO, said that since the hack, wrapped stETH and wrapped Ether deposits have fallen.

However, there is now more unused Ether liquidity in the system, and the annualized borrowing rate has fallen to 1.9%, which he said could bring back traders interested in leveraged Ether yield strategies.

Ether utilization has dropped back below 90%. Source: Tom Wan

“ETH utilisation has dropped back below 90% with borrow APY now at 1.9%. Since the rsETH LZ hack, wstETH and weETH deposits are down $1.2B and $1.76B respectively,” Wan said.

“With wstETH/weETH to ETH loops now back to profitable, the question is whether ETH loop demand returns or if the capital stays on the sidelines/flows to Spark/Morpho,” he added.

Kelp sunsetting rsETH bridging on some networks

Meanwhile, Kelp DAO is also in the process of its own recovery efforts. On Sunday, the protocol said it’s “consolidating our supported networks to ensure the highest security standards for rsETH based on usage and integrations,” by sunsetting rsETH bridging in select networks after June 15, including Optimism, HyperEVM, Unichain, Avalanche and MegaETH.

Related: Aave files emergency motion to lift restraining notice on frozen ETH

After the deadline, recovery of funds will cost 100 USDC (USDC) per address, according to Kelp.

Earlier this month, Kelp DAO migrated its restaking token, rsETH, to the Chainlink oracle platform while continuing to blame the attack on LayerZero’s cross-chain infrastructure, its previous provider.