The Aave DAO is considering a proposal to allocate 25,000 ETH from its treasury to the ongoing DeFi United recovery efforts that will help close the funding gap created by the rsETH incident tied to KelpDAO.
Aave said in a post on X that its service providers had published a governance proposal for the DAO to contribute 25,000 ETH to DeFi United. The protocol said the ETH contribution would go toward restoring rsETH’s backing and normalizing market conditions as quickly as possible.
The proposal, published by TokenLogic as an Aave Request for Comment (ARFC), asks Aave token holders to approve financial assistance from the DAO treasury as part of a wider ecosystem effort to resolve the rsETH shortfall.
KelpDAO exploit triggered the crisis
The shortfall traces back to an April 18 exploit involving KelpDAO’s cross-chain bridge infrastructure. Attackers manipulated the system to mint approximately 116,500 rsETH, worth roughly $292 million at the time, without locking equivalent ETH as collateral.
Instead of selling the tokens on open markets, the attacker deposited the unbacked rsETH into lending protocols, including Aave, and borrowed real assets such as wrapped ether. This left protocols with positions backed by effectively worthless collateral.
The incident exposed weaknesses in cross-chain verification systems and quickly escalated into a liquidity crisis across DeFi, as lending pools faced rising utilization and users rushed to withdraw funds.
Recovery plan built around fixed treasury support
The 25,000 ETH contribution is structured as a fixed allocation rather than a variable amount. This means additional donations or ecosystem contributions after approval will not reduce Aave’s share. Instead, any excess funds would be directed toward repaying credit lines used during the recovery process.
The proposal also authorizes designated entities to act on behalf of the DAO in executing the plan, including entering loan agreements, managing collateral, and coordinating with other participants. This could involve using treasury assets or future protocol revenue streams as part of financing arrangements tied to the recovery.
Industry coordination through “DeFi United”
The funding effort is being coordinated under a broader initiative involving multiple DeFi protocols and contributors. Early contributors include EtherFi, Lido, Mantle, Stani, Ethena, Ink Foundation / Tydro, Golem Foundation, Golem Project, Emilio, BGD Labs, and Ernesto, with more contributors expected.
The structure combines direct contributions, pledged funds, and short-term borrowing to ensure enough liquidity is available upfront to restore rsETH backing, even if some recoveries take longer to materialize.
Scale of losses and partial recoveries
The shortfall originated after a breakdown in the cross-chain backing mechanism, which left a large amount of rsETH effectively uncollateralized. Initial estimates placed the deficit at over 160,000 ETH.
Subsequent actions, including freezing compromised assets and identifying recoverable positions, have reduced the gap significantly. However, a meaningful portion of these recoveries remains locked or pending, leaving a residual deficit that still requires active funding.
Bridging liquidity gaps with loans
A key element of the proposal is the use of short-duration loans to bridge the gap between immediate funding needs and delayed recoveries. The recovery plan requires a larger upfront capital injection than what is currently liquid, meaning borrowed funds may temporarily fill that difference.
These loans are expected to be repaid in stages as recoveries are realized. The proposal outlines a repayment structure where incoming funds are first used to settle short-term obligations before addressing longer-term credit facilities.
Safeguards and governance oversight
The proposal introduces limits on how the DAO can engage in the recovery process. Borrowing tied to the plan is capped relative to the remaining funding gap, and any revenue used for repayment is subject to predefined limits.
In addition, the DAO is expected to receive ongoing updates as recovery funds are unlocked, and may take further governance actions if conditions change or additional support is required.
Why Aave is stepping in
The move aligns with Aave’s past approach to handling systemic events, where the protocol has opted to absorb or mitigate losses to protect users and maintain market stability.
By contributing to the recovery, the DAO aims to restore confidence in affected markets, ensure liquidity conditions normalize, and avoid prolonged disruptions across its lending pools.
Governance decision ahead
The proposal is currently under discussion and will move to a vote if it progresses through governance stages. Approval would mark a significant step in a broader, coordinated attempt to resolve one of the largest DeFi incidents of the year.
If approved through a Snapshot vote, Aave DAO representatives would make the funds available for the recovery plan. The proposal would also authorize Aave Labs, or a designated affiliate, to act as counterparty for loan, settlement, indemnity or legal arrangements tied only to resolving the rsETH shortfall.
TokenLogic said more details on the final asset composition, payment schedule, counterparty terms and financial implications will be shared in a later governance publication once the recovery plan advances.
The outcome will shape not only Aave’s balance sheet exposure but also how decentralized protocols collectively respond to cross-chain failures and systemic risk.
Also Read: Mantle’s 30,000 ETH Loan for Aave Comes With a Strategic Catch
