Nearly $300 million left the Ethereum-based Kelp DAO on Saturday, security experts reported.
Cryptopolitan I mentioned Kelp DAO said it “identified suspicious cross-chain activity involving rsETH” and temporarily halted rsETH contracts while it worked with security experts.
ZRO fell rapidly, falling 18% from $2 to $1.4. At the same time, a leveraged whale long on HyperLiquid was partially liquidated, losing $2.88 million.
This kind of forced deconstruction sends a message. People see the liquidation, they don’t ask questions, they just walk out. Liquidity declines, and price follows.
DeFi protocols freeze exposure as rsETH spreads risk everywhere
The problem has been exacerbated by rsETH being plugged in many places. This token is linked to lending markets, return strategies, and leverage rings via DeFi. On X, Ignas described the exploit as “atrocious due to widespread DeFi integrations” and that the full exposure remains unclear.
Aave V3 has already frozen its markets. SparkLend also closed the rsETH market. Fluids froze activity as well. Upshift has temporarily suspended both High Growth ETH and Kelp Gain vaults. Lido Earn is included through the Mellow meta-vault strategy, and this setup will likely involve leverage.
The Pendle symbols PT and YT are also associated with this structure. Compound and Euler are part of the wider network, and some of Beefy’s strategies may also be affected, with exposure likely through Yearn.
Ignace also noted that LayerZero could be affected since rsETH was linked from L2 networks. This raises an immediate problem. If rsETH is stuck or broken on L2s, these tokens may not hold real value at the moment.
He added that the situation is still evolving and said he didn’t want to spread fear, but also made clear that “there aren’t a lot of places to hide in DeFi” during events like this.
The former Euler Labs CEO explains how losses, liquidations and bad debts can mount
“The fallout from the Kelp rsETH exploit will be messy and potentially a little more serious than some people are currently imagining,” said Michael Bentley, former CEO of Euler Labs.
He explained that rsETH on the mainnet may still be supported, but there is no liquidity to sell it, and with contracts temporarily halted, “there is currently no usable redemption path either.”
Michael ran the numbers too. If the losses were distributed among all coin holders, rsETH would be approximately 81.25% of its original value based on a loss of $300 million versus $1.6 billion.
But he made clear that such an approach was unlikely, saying it would “likely push a number of large positions in Aave towards reducing collateral and risk creating bad debt,” which could lead to legal battles.
Michael also said that L2 holders would likely take the hit instead. He asked about the identity of these owners and noted that they could be independent independent organizations or funds that are now suffering from significant losses. He added that affected users may attempt to take legal action to impose shared losses, which could further delay recoveries.
Michael said that once redemptions reopen, Lending platforms It is unlikely that rsETH will be accepted as collateral again. This means a massive cannibalization of rsETH and ETH ring trades.
Right now, these deals are already bleeding. Aave ETH utilization is 100%, borrowing costs are 8.71%, and ETH returns are around 2.5%. This puts returns deep into negative territory, ranging from around -6.21% to -90%.
Michael explained that the normal break-up process, which involves swapping collateral and paying off debt, may not work on this scale. Without sufficient liquidity, traders may have to manually pull back step by step.
Michael He added“If rsETH is no longer a collateral and no longer has the ability to borrow, this makes it more difficult for people to manually pull back as well.”
If positions remain stuck while interest is growing, the stock will be wiped out. Once the debt exceeds the recoverable collateral, bad debts form and continue to grow.
