Hold Wrapped Ether (WETH) reserves in Aave V3 after the attackers exploited KelpDAO's liquid staking token rsETH and used it as collateral to borrow against the lending protocol.

Solidity developer and contract auditor 0xQuit warned depositors via platform X, indicating that the WETH pool has effectively been compromised and partial withdrawals may only become possible after Aave's umbrella covers the financial gap.

How the draining of rsETH caused a distressed debt on Aave.

The exploitation began when the attacker funded wallets through Tornado Cash. Approximately 116,500 rsETH was drained from KelpDAO, bringing the total value to over $290 million.

The attacker then supplied the stolen rsETH as collateral on Aave V3 and borrowed a large amount of WETH against it.

Since rsETH lost its coverage after the drain, these positions became effectively unliquidatable. This left Aave holding WETH obligations that it could not recover through normal liquidation.

0xQuit, a Solidity developer and contract auditor, warned that the news is not good at all and that WETH on Aave appears to be in serious trouble. He urged users to withdraw if they can, but it may be too late. Source

rsETH markets have been frozen in both Aave V3 and Aave V4, and Aave confirmed that the contracts were not exploited as the incident is related solely to rsETH.

Aave stated that freezing the rsETH markets prevents new deposits and borrowing against rsETH collateral while assessing the situation. They added that they are reviewing information on rsETH borrowings on Aave that occurred after the exploitation,...and if a distressed debt protocol accumulates due to this incident, Umbrella assets can be used to cover the shortfall. Source

What does Umbrella mean for WETH depositors?

The Umbrella system from Aave, which replaced the old safety unit at the end of 2025, was specifically designed for this scenario.

Users who staked aWETH in the Umbrella treasury face an automatic haircut to cover the shortfall.

After the haircut cycle ends, remaining WETH suppliers should regain partial withdrawal capability.

However, full recovery cannot be guaranteed, and depositors may face a haircut on their positions.

This incident represents the first major real-world test of the automated bad debt coverage of the Umbrella system. It also raises new questions about the risks of including liquid staking tokens as collateral in lending protocols.

In the meantime, the Abshift team, which provides non-custodial vaults for managing crypto assets, reassured users that they have no exposure to rsETH.

The Abshift team wrote that they are in contact with the Kelp Dog regarding a potential exploitation of rsETH. As a precaution, the Kelp team decided to temporarily halt deposits and withdrawals from the High Growth ETH and Kelp Gain vaults while investigations are conducted. They added that the Upshift USDC, Core USDC, and EarnAUSD vaults have no exposure to rsETH. They confirmed that they will provide updates as soon as they receive them from the Kelp team.