Aave restores WETH borrowing as Kelp DAO recovery moves ahead

Aave has restored borrowing against wrapped Ether across affected markets as the decentralized lending protocol continues recovering from the fallout tied to Kelp DAO’s April exploit.

In a post published Sunday, Stani Kulechov said Aave had reinstated loan-to-value ratios for wrapped Ether collateral on Aave V3 Ethereum Core, Ethereum Prime, Arbitrum, Base, Mantle, and Linea, allowing users to once again borrow against WETH and execute collateral or debt swaps.

According to Aave governance documents, the restrictions had been introduced as emergency safeguards after attackers exploited Kelp DAO’s LayerZero-powered bridge on April 18 and used unbacked rsETH as collateral on Aave V3 to borrow large amounts of wrapped Ether. Governance participants later approved a proposal to remove the WETH freeze after recovery efforts progressed without additional user risk.

Earlier stages of the recovery process included restoring backing for rsETH with Ether recovered after the exploit, reopening withdrawals, and coordinating token support from protocols participating in the DeFi United recovery initiative.

Court battle over frozen Ether still unresolved

At the same time, legal and governance procedures surrounding frozen Ether tied to the exploit are still ongoing.

A binding Arbitrum Improvement Proposal opened for voting on May 15 after affected parties sought approval to transfer 30,765 ETH, worth roughly $71 million at the time, from the Arbitrum Security Council wallet to an address controlled by Aave LLC. Court filings showed the funds had been frozen on April 21 after investigators linked the assets to wallets associated with the exploit.

Before the governance process moved ahead, Judge Margaret Garnett of the Manhattan federal court modified an earlier restraining notice on May 9, allowing the transfer to proceed while protecting governance voters and related participants from personal liability tied to the order.

Legal claims over the Ether remain active, however. Gerstein Harrow LLP, representing families pursuing unpaid terrorism judgments against North Korea, argued in court filings that the assets could constitute property linked to the Lazarus Group because blockchain analytics firms attributed the exploit to North Korean state-backed actors. No court has formally determined that attribution as a legal fact.

Responding to the dispute earlier this month, Kulechov stated that the recovered assets belonged to users affected by the exploit and should not be treated as property lawfully owned by attackers.

Lending activity and liquidity conditions change after exploit

Data from DefiLlama showed Aave’s total value locked fell by more than $8 billion after the incident. As of Monday, the protocol held roughly $14.8 billion in TVL compared with nearly $23.5 billion in March.

The exploit itself generated approximately $195 million in bad debt on Aave after attackers allegedly linked to North Korean hacking groups stole around 116,500 Kelp DAO Restaked Ether tokens and used them to drain wrapped Ether liquidity from the lending markets.

Meanwhile, recovery work at Kelp DAO is continuing on a separate track. On Sunday, the protocol announced plans to discontinue rsETH bridging support on Optimism, HyperEVM, Unichain, Avalanche, and MegaETH after June 15 as part of what it described as a network consolidation effort focused on security and integration activity.

Kelp DAO added that users seeking to recover funds after the deadline would face a 100 USDC fee per address. Earlier this month, the protocol also migrated rsETH to Chainlink’s oracle infrastructure while continuing to attribute the exploit to vulnerabilities tied to LayerZero’s cross-chain systems, its former provider.