The same architectural openness that turned a spoofed, cross-chain message at Kelp DAO’s bridge into hundreds of millions of bad debt at Aave has produced its own antidote in 48 hours: a coalition of DeFi protocols has launched an emergency exit.
Fluid, a DeFi DEX and lending protocol, has developed a way to do this along with other DeFi protocols $ETH savers and loopers on Aave to swap their positions out of WETH, leaving the protocol altogether or switching to another type of collateral, at a time when instant withdrawals are no longer available following the $290 million Kelp DAO exploit.
The aWETH Redemption Protocol processed 58,510 aWETH, or approximately $136 million, from Aave’s frozen WETH pool in the first 48 hours, according to the live Dune dashboard that Fluid publishes.
The protocol was built within 24 hours in response to Aave’s $ETH usage reaches 100% after the exploit of Kelp DAO’s rsETH bridge adapter on April 18.
How it works
The infrastructure makes Aave $ETH lenders to exchange aWETH into wstETH or weETH collateral in a single transaction, at a discount of approximately 2.21% for an aWETH swap of 1,000 per 1inch co-founder Sergej Kunz. With early exits via secondary markets, the result was almost 23% below par.
Two user scenarios are supported: For lenders, aWETH is converted to wstETH and weETH collateral. Users can then withdraw their funds. For borrowers, the collateral changes from $ETH to wstETH or wETH collateral. Debt remains unchanged and users can exit a previously locked position or remain on Aave with yield-bearing collateral.
Lenders provide AWETH in Fluid’s Lite $ETH Vault in exchange for wstETH or wETH. The vault then uses the incoming aWETH to repay a portion of its own WETH debt to Aave, wiping out an obligation without requiring WETH to leave Aave’s pool. The settlement works because Fluid is the largest user of the Aave WETH market, with approximately $1.5 billion in $ETH debt to his daisy-chained Lite Vault positions.
Because Fluid is already obligated to service the debt, the protocol assumes no new directional risk. It exchanges one claim on LST collateral for another, with the exiting lender taking a modest haircut and the vault reducing its borrowing exposure in a market where supply is otherwise locked up.
Lido Finance, Ether.fi, 0x Protocol, 1inch and KyberNetwork use the protocol. Lido and Ether.fi contribute to LST liquidity, 1inch shipped the front end, and 0x and Kyber route orders. The DAO’s recommended Aave withdrawal guidelines now direct captured WETH suppliers to the Fluid route.
“$ETH usage on Aave reached 100% and lenders had no exit. Fluid built the infrastructure in hours, with significant support capacity $ETH lenders at scale,” Fluid founder and CTO Samyak Jain said in an announcement.
Kelp DAO exploit context
On April 18, an attacker took advantage of Kelp DAO’s LayerZero-based rsETH bridge adapter and minted 116,500 rsETH, approximately $293 million, or 18% of the circulating supply, without a corresponding amount locked on the Ethereum side. The attacker provided the unsecured rsETH as collateral on Aave V3 and V4 and lent approximately $236 million to WETH before the markets were frozen.
Aave’s WETH utilization reached 100% within hours as lenders attempted to withdraw before the bad debts were acknowledged, breaking the credit invariant that allows passive withdrawals. Variable lending rates rose to triple digits and aWETH began trading at a discount on the secondary markets.
Aave’s risk team, in its April 20 incident report, modeled the bad debt at a value between $123.7 million and $230.1 million, depending on how claims on the collateralized rsETH L2 adapter are allocated.
Kelp DAO and LayerZero have continued to dispute responsibility. Kelp’s April 19 statement argued that the 1-of-1 DVN configuration used on the bridge was LayerZero’s documented standard in the Quick Start Guide and was appropriately reaffirmed by the LayerZero team during Kelp’s L2 expansion. LayerZero attributed the exploit to the TraderTraitor subgroup of the North Korea-linked Lazarus Group and said it will no longer allow new OFT deployments to ship with 1-to-1 DVN configurations.
The dimension of compossibility
The architectural feature that allowed the exploit to spread across Aave, Compound, Fluid, and other locations allowed the redemption protocol to be put together in less than a day. aWETH is a standardized receiving token, wstETH and weETH are standardized LSTs, Aave’s “repaywithAtokens” feature is public and permissionless, and aggregators can obtain liquidity from anywhere. The Fluid flow combines these primitives without a board vote, a withdrawal of the government bonds or a new counterparty relationship.
The protocol does not reduce Aave’s modeled bad debt, does not roll back the attacker’s loans, and does not impact the LayerZero-Kelp dispute. It offers an individual way out for lenders who would otherwise wait for a socialization outcome or accept a larger market discount.
Fluid said the capacity is significant and additional partners are being brought in.