Aave reinstates WETH borrowing functionality as rsETH recovery efforts advance
As a protective response to the security breach, Aave implemented a temporary suspension on WETH operations, in addition to imposing freezes on both rsETH and wrsETH reserve assets.
Borrowing capabilities against wrapped Ether have been reinstated for Aave users on the decentralized finance platform, as recovery initiatives following the Kelp DAO security incident continue to move forward.
In a statement posted on X this Sunday, Aave's founder Stani Kulechov announced that the protocol has successfully returned loan-to-value (LTV) ratios for wrapped Ether (WETH) back to their original settings before the incident across all impacted blockchain 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.
Stani Kulechov
According to Aave, the temporary suspension placed on WETH served as a precautionary security protocol implemented following the exploit, along with comparable freezes applied to the rsETH and wrsETH reserve pools. Nevertheless, a governance proposal that achieved approval on Saturday indicated that considering the substantial advancement demonstrated in the recovery process, the freeze could be "lifted now without compromising user protection."
This development represents the concluding component of "Phase II" within the rsETH recovery roadmap, which additionally encompassed restoring rsETH's underlying asset backing through the utilization of Ether that was frozen following the exploit and contributed tokens from the DeFi United coalition, as well as enabling withdrawal functionality.
Aave's total value locked experiences decline following Kelp security breach
Cybercriminals suspected of having connections to state-sponsored North Korean threat actors made off with 116,500 Kelp DAO Restaked Ether tokens on April 18 from Kelp DAO's bridge powered by LayerZero technology, subsequently utilizing them as loan collateral on Aave V3 to obtain wrapped Ether, which created approximately $195 million in bad debt on the Aave platform.
The total value locked (TVL) within Aave experienced a decline exceeding $8 billion in the aftermath of the exploit, based on data from DefiLlama. At the time of writing on Monday, the platform's TVL stands at approximately $14.8 billion, representing a decrease from the $23.5 billion recorded in March.
According to Tom Wan, who serves as head of data at consulting firm Entropy Advisors, which maintains a partnership with the Arbitrum DAO, deposits of wrapped stETH and wrapped Ether have experienced reductions following the security incident.
That said, the system currently contains a greater volume of available Ether liquidity, and the annualized rate for borrowing has declined to 1.9%, which he indicated could potentially attract traders back who are interested in pursuing leveraged Ether yield strategies.
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.
Tom Wan
"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 DAO phasing out rsETH bridge operations across certain networks
In the meantime, Kelp DAO is actively pursuing its own set of recovery measures. On Sunday, the protocol announced that it is "consolidating our supported networks to ensure the highest security standards for rsETH based on usage and integrations," through the discontinuation of rsETH bridging capabilities on selected networks following June 15, which includes Optimism, HyperEVM, Unichain, Avalanche and MegaETH.
Following the established deadline, fund recovery operations will incur a charge of 100 USDC (USDC) for each address, as stated by Kelp.
In developments from earlier this month, Kelp DAO completed the migration of its restaking token, rsETH, to the Chainlink oracle platform infrastructure while maintaining its position that the attack stemmed from vulnerabilities in LayerZero's cross-chain infrastructure, which served as its previous service provider.