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Aave just liquidated the Kelp DAO hacker’s rsETH positions. Both Ethereum and Arbitrum networks saw the action, which brings the lending protocol within striking distance of wiping out the bad debt left from the exploit.
The liquidation happened fast. Thaddeus Pinakiewicz from Galaxy Digital said Aave’s now only 10% away from full recovery. That’s pretty significant progress considering how much damage the hack did to the protocol’s balance sheet. The hacker held rsETH positions across two chains, and Aave went after both. Ethereum saw liquidations first, then Arbitrum followed. By targeting these specific positions, Aave’s basically clawing back funds that got tied up when the Kelp DAO breach went down.
What the Liquidation Means for Aave
The bad debt from Kelp DAO hit Aave hard. Lending protocols live or die by their collateral ratios, and when a hacker exploits a connected protocol like Kelp DAO, the fallout spreads fast. Aave got stuck holding positions that couldn’t cover their borrowed amounts. So the protocol’s been working through a recovery plan for weeks now.
Liquidating the hacker’s rsETH is a big piece of that puzzle. rsETH is Kelp DAO’s liquid restaking token, and it was at the center of the exploit. The hacker used it as collateral, borrowed against it, then manipulated things so the positions went underwater. Aave’s liquidation engine kicked in, but the damage was already done. Now, by forcing these positions closed, Aave’s converting whatever value is left back into assets it can actually use to cover the shortfall.
Galaxy Digital’s been tracking the recovery closely. Pinakiewicz didn’t give exact numbers on how much bad debt remains, but 10% away from full recovery suggests Aave’s made serious headway. The protocol probably started with millions in bad debt. Getting to 90% recovery means most of that’s been reclaimed or offset through liquidations and other mechanisms.
Ethereum and Arbitrum Both Targeted
The hacker spread positions across networks. That’s pretty common for people trying to complicate recovery efforts. Ethereum holds the bulk of DeFi liquidity, but Arbitrum’s become a major secondary market for protocols like Aave. By holding rsETH on both chains, the hacker made Aave’s job harder.
Aave had to coordinate liquidations on two separate networks with different gas costs and liquidity conditions. Ethereum liquidations are expensive but liquid. Arbitrum’s cheaper but sometimes harder to execute large orders without slippage. The protocol managed both, which shows its liquidation infrastructure still works even under stress.
No word yet on exactly how much rsETH got liquidated or what the final recovery value was. Liquidations don’t always return full value, especially when the underlying asset is from a compromised protocol. rsETH’s price probably took a hit after the Kelp DAO news broke, so Aave might’ve liquidated at a discount to what the positions were originally worth.
Kelp DAO itself hasn’t said much about the hack’s full scope. The protocol offers liquid restaking, which means users deposit ETH or staked ETH derivatives and get rsETH in return. That rsETH can then be used across DeFi as collateral. When the exploit happened, it created a cascade where rsETH’s value got questioned, positions went bad, and Aave got caught in the middle.
What’s Left to Recover
Ten percent doesn’t sound like much, but in DeFi terms it can still be millions of dollars. Aave’s a massive protocol with billions in total value locked, so even a small percentage of bad debt is a real problem. The remaining 10% might come from positions that are harder to liquidate, assets that lost too much value, or debts where the collateral is completely gone.
Aave’s probably working through other recovery mechanisms too. Some protocols use insurance funds or reserve pools to cover bad debt. Aave has a safety module where users stake AAVE tokens to backstop the protocol. That fund might be covering part of the remaining shortfall. Or Aave could be waiting for more liquidation opportunities as market conditions change.
The timing of these liquidations matters. Crypto markets have been volatile, and liquidating during a price spike can recover more value than liquidating during a dump. Aave likely waited for favorable conditions on both Ethereum and Arbitrum before executing. Gas fees on Ethereum fluctuate wildly, so choosing the right moment saves money and improves recovery rates.
Pinakiewicz’s update didn’t include a timeline for closing that final 10% gap. Could be days, could be weeks. Depends on market conditions and whether any other assets tied to the hack become available for liquidation. Aave’s incentivized to move fast because bad debt sits on the books and makes the protocol look risky to users and investors.
Recovery efforts like these test a protocol’s resilience. Aave’s been around since 2020 and weathered multiple market crashes and exploits. The Kelp DAO situation is just the latest challenge. By moving quickly to liquidate the hacker’s positions, Aave’s showing it can respond to threats and protect its users’ funds.
The broader DeFi ecosystem is watching too. Liquid restaking is still pretty new, and the Kelp DAO hack raised questions about how safe these tokens really are when used as collateral. If Aave can recover fully, it sends a signal that even when things go wrong, established protocols have the tools and resources to bounce back.
Aave’s liquidation engine ran on both chains without major hiccups. That’s not guaranteed in DeFi, where smart contract bugs and network congestion can derail even routine operations. The fact that Aave pulled off coordinated liquidations on Ethereum and Arbitrum suggests its infrastructure is solid.
Users depositing funds into Aave want to know their assets are safe even when connected protocols get exploited. The Kelp DAO recovery shows Aave can isolate problems and work through them without collapsing. That’s crucial for maintaining trust in a space where hacks and exploits are unfortunately common.
The hacker’s rsETH is gone now. Liquidated and converted into assets Aave can use to shore up its balance sheet. The protocol’s 90% of the way back to where it was before the hack. That last 10% is the hard part, but Aave’s made it this far.
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Frequently Asked Questions
How much bad debt does Aave still have from the Kelp DAO hack?
Aave is 10% away from full recovery, according to Thaddeus Pinakiewicz from Galaxy Digital, but the exact dollar amount of remaining bad debt wasn’t disclosed.
What is rsETH and why was it liquidated?
rsETH is Kelp DAO’s liquid restaking token that the hacker used as collateral on Aave. Aave liquidated these positions on Ethereum and Arbitrum to recover funds and reduce bad debt from the exploit.
