DeFi players scramble to plug bad debt from KelpDAO exploit
Industry heavyweights such as Lido, EtherFi, and Mantle have proposed substantial amounts of ethereum to backstop Aave, the largest lending protocol.
Players in the decentralized finance ecosystem have mobilized in the past week to contain the fallout (and contagion) following the recent exploit of ethereum-based protocol KelpDAO.
Arbitrum’s Security Council froze 30,766 ETH linked to the exploit, in one of the first concrete containment actions following the incident.
The core contributor team of Mantle, a layer 2 network backed by Bybit, proposed Thursday lending up to 30,000 ETH to Aave DAO to help offset the bad debt tied to the exploit.
The Ink Foundation, tasked with stewarding the layer 2 network incubated by Kraken, is contributing to the relief effort around the KelpDAO incident, but did not disclose its allocation.
Meanwhile, the EtherFi Foundation put forward a governance proposal to deploy 5,000 ETH to absorb the shortfall and “protect end users across the broader DeFi stack.”
Aave Labs is also stepping in: CEO Stani Kulechov said he is personally contributing 5,000 ETH to relief efforts, while Emilio Frangella, the firm’s senior VP of engineering, pledged 500 ETH to the recovery.
Other ecosystem groups are joining the backstop. Lido Labs Foundation, the organization backing the largest staking provider, which had exposure to the exploit, proposed an allocation of 2,500 stETH to reduce broader spillover.
The Golem Foundation and Factory made a contribution to relief efforts of 1,000 ETH from its treasuries.
Bored Ghosts Developing Labs stated it will contribute 250 ETH, showing that the recent news it terminated its engagement with Aave DAO wouldn’t deter it from offering a helping hand.
LayerZero and Frax Finance both expressed willingness to contribute as well.
The efforts aim to address bad debt after the KelpDAO attacker exploited roughly $290 million in cryptocurrencies and used it as collateral to borrow $228 million in total — loans widely assumed unlikely to be repaid. Of that, nearly $191 million was borrowed from Aave alone, according to its incident report.
Aave, which is the largest lending protocol in the DeFi space, posted that it has continued to freeze reserves following the hack on growing concerns about “looping trades” — basically that users are repeatedly borrowing against collateral to acquire more of the same asset.
Update on rsETH incident:
— Aave (@aave) April 23, 2026
rsETH reserves have been paused across Ethereum Core, Arbitrum, Base, Mantle, and Linea.
This was done with the objective of recovering additional funds as the recovery plans progress.
We will keep the community updated on the next steps as the…
Amid all this, crypto trading firm Auros’ investment thesis on ethereum remains unchanged. “While large-scale exploits, particularly those linked to state-sponsored actors, are inherently concerning, our view of the Ethereum ecosystem and its partners has strengthened in light of the response,” per Jason Atkins, chief commercial officer at Auros.
“If anything, the way the ecosystem responds to stress events provides further validation of its long-term viability,” Atkins told Sherwood News.
