Here’s How DeFi United Plans to Recover KelpDAO’s 116,500 rsETH

A joint initiative of ecosystem partners, DeFi United, has revealed a detailed roadmap to restore KelpDAO’s rsETH and normalize lending markets after the platform suffered a $292M hack on April 18.

To fund the recovery process, the group has secured about 132,000 ETH (roughly $300 million) in pledges from major DeFi participants, including Aave, ConsenSys, Mantle, and others, to fully re-collateralize KelpDAO’s rsETH by depositing ETH into the bridge lockbox.

KelpDAO’s $292M Attack

On April 18, an attacker breached KelpDAO’s LayerZero-based rsETH bridge, stealing about 116,500 rsETH worth approximately $292 million.

As an aftereffect of the hack, the Aave token experienced a downturn. Other protocols, such as Compound, Euler, Fluid, Spark, Morpho, and Lido Finance, took immediate steps to implement risk controls. However, the platform couldn’t recover any of the stolen assets and incurred a huge debt.

A few days after the hack, the Arbitrum Security Council managed to recover about 24% of the stolen funds (roughly $71 million) by transferring them into a frozen wallet. While this move was good news for investors affected by the hack, it sparked debate within the crypto community. Some critics argued that the council’s action in seizing the funds challenged decentralization, while supporters believed it was necessary to limit further damage and protect users.

DeFi United Restoration Framework

Aave, alongside a slew of partners across the crypto ecosystem, came together to form the DeFi United initiative. The DeFi United restoration framework will roll out in phases instead of a single payout, pending how token holders will vote in approval, finalized timelines, and executed agreements. The roadmap will involve restoring the rsETH backing and resolving positions affected during the hack.

In the first phase, the pledged ETH will be converted into rsETH and deposited into the bridge’s lockbox contract, with the aim of aligning the asset’s price with its target exchange rate of roughly 1.07 ETH per rsETH.

After that, operations will be put in place to clear up the eight positions affected during the hack to recover 13,000 ETH on Aave and about 16,776 ETH on the Compound protocol.

This second phase will involve a structured liquidation process that temporarily lifts the pricing mechanisms to facilitate the closure of these positions. The recovered rsETH collateral will then be transferred to a multisig wallet managed by DeFi United, converted back into ETH, and used to cover the losses incurred within the affected protocols.

Managing Risks

To complete the restoration process, DeFi United will work on restoring normal market operations across the ecosystem. This would involve the first stages mentioned earlier, resuming lending and borrowing activities, and returning the loan-to-value parameters to their normal state, thereby restoring stability to the affected market in the future.

However, there are risks involved in fully executing the recovery process. The success of the entire recovery process depends heavily on whether token holders vote on approvals, agreements are finalized, and execution is coordinated across participating protocols such as Aave.

To manage these risks, ETH token conversions and lockbox deposits will be processed in phases rather than all at once. Despite this structured approach, which is intended to reduce disruption and delays, the recovery process will still be affected by execution delays and uncertainties, especially as new security measures are undergoing live testing.

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