Solana Foundation deploys USDT to support Aave as DeFi United push hits $300M

Arbitrum freeze and recovery proposal

Arbitrum’s Security Council froze 30,765 ETH linked to the attacker. On April 27, Aave Labs proposed unfreezing the funds, valued at about $73.5 million, and redirecting them to the DeFi United recovery address.

Aave Labs said the funds would “restore normal conditions for Arbitrum users” and described the assets as “a material contribution” to restoring rsETH backing. The proposal includes returning funds to Arbitrum if recovery fails and sets a 49-day timeline for completion.

The attack began at 17:35 UTC at Ethereum block 24,908,285, targeting KelpDAO’s LayerZero V2 bridge configured as a 1-of-1 Decentralized Verifier Network. Attackers submitted a forged inbound packet that bypassed verification, minting rsETH without any corresponding asset backing.

The attacker rapidly deployed the assets, depositing approximately 89,567 rsETH valued at around $221 million as collateral across Aave V3 markets on Ethereum and Arbitrum. Against this, roughly 82,650 WETH, worth about $191 million, along with smaller amounts of wstETH, were borrowed. Positions were structured with health factors between 1.01 and 1.03, leaving them just above liquidation thresholds and making repayment unlikely.

A second malicious packet targeting an additional 40,000 rsETH was submitted but stopped before execution, indicating further intended damage. Aave’s core smart contracts were not breached, with losses stemming from acceptance of unbacked collateral originating from the bridge failure.

Liquidity shock and bad debt exposure

The exploit rapidly escalated into a systemic liquidity crisis. WETH utilization across Aave pools reached 100%, preventing withdrawals due to lack of available liquidity. Galaxy Research explained: "At full utilization, Aave's design doesn't allow withdrawals, because there is no idle liquidity in the pool to redeem against. Whoever withdraws first is made whole, while whoever comes later must wait for new supply to arrive or borrowers to repay."

Aave’s Protocol Guardian froze all rsETH and wrsETH reserves across deployments by approximately 19:00 UTC, setting loan-to-value ratios to zero and adjusting interest models. Aave Labs and Llamarisk later outlined two bad debt scenarios on April 20.

External estimates placed total exposure between $196 million and $200 million. Oak Research reported a 17% decline in total value locked across DeFi, with more than $12 billion in outflows from Aave alone. Aave’s TVL dropped between $6 billion and $9 billion, while broader DeFi losses exceeded $13 billion. The AAVE token declined between 10% and 22% following the incident.

Oak Research said the episode exposed how lending protocols can function as designed while still importing catastrophic risk from external infrastructure, describing the event as having “bank-run optics” across DeFi.

DeFi United mobilizes multi-protocol recovery

A coordinated recovery effort, DeFi United, was formed to backstop the rsETH shortfall. The initiative targets between 68,900 ETH and more than 100,000 ETH in contributions depending on recovery outcomes.

By April 26, Arkham Intelligence confirmed $160 million raised, while total commitments approached nearly $240 million as of April 27. Dune Analytics data showed about $21 million deposited on-chain, with $215 million pledged pending governance approval.

Additional contributions included 1,000 ETH from Golem Foundation and 500 ETH from Emilio Frangella, alongside more than 272 ETH in community donations.

Later on, support for the DeFi United recovery effort expanded further as Circle Ventures, Consensys, and Joseph Lubin pledged additional backing to address losses tied to the KelpDAO exploit.

Circle Ventures said it is purchasing AAVE tokens to help offset the impact of the incident, stating: "Strong DeFi infrastructure does not build itself. Aave is helping to shape the future of onchain finance, and we’re backing that ecosystem and the entire community built around it."

Consensys and Lubin confirmed a combined contribution of 30,000 ETH, representing one of the largest single commitments within the coordinated recovery effort.

With the latest pledges, DeFi United has surpassed 132,000 ETH in total contributions, valued at more than $300 million, marking a continued escalation in ecosystem-wide support as protocols and industry participants respond to the shortfall.

Curve founder proposes market-based recovery alternative

Michael Egorov proposed an alternative approach to handling bad debt in DeFi lending markets, framing it as a market-driven mechanism rather than a coordinated bailout response.

Egorov outlined a model that would convert distressed positions into a tradable investment product, allowing participants to buy into recovery opportunities instead of relying on direct capital injections or treasury-backed support. The proposal is being tested using Curve’s CRV-long LlamaLend market as an initial pilot.

He described the concept as “not a donation but an investment vehicle for everyone who participates,” suggesting that recovery efforts could be structured to align incentives between risk-takers and capital providers.

The idea enters an ongoing debate over how DeFi should handle cross-protocol failures, as the KelpDAO exploit has already prompted multiple recovery strategies ranging from structured loans to ecosystem-wide funding commitments.