46 minutes, $292 million stolen, DeFi faces development dilemma again

Author: Gu Yu, ChainCatcher

In the early hours of April 18, just two weeks after the theft of over $200 million from Drift, Kelp DAO, a DeFi re-staking protocol under Kernel, has once again set a record for the amount stolen in the crypto industry this year: 116,000 rsETH maliciously minted, worth approximately $292 million.

It is reported that Kelp DAO is a triple-yield re-staking protocol based on EigenLayer. rsETH is a liquidity re-staking token (LRT) issued by Kelp DAO, designed to provide liquidity for non-liquid assets deposited into re-staking platforms (such as EigenLayer).

The core team of the protocol is entirely from India. In September 2024, the protocol secured $9 million in funding, with numerous well-known investors including Laser Digital, Bankless Ventures, and Hypersphere Ventures participating. Currently, the total locked amount of the protocol exceeds $1.5 billion. In the same year, its parent company Kernel also received investment from Yzi Labs, which has close ties to Binance.

However, these once-proud backgrounds and achievements were shattered in an instant during this tragic incident.

Fatal Cross-Chain Forgery and the Cost of "Single-Signature"

According to preliminary analysis of on-chain records, this attack was not a traditional re-entry attack or flash loan, but a precise strike based on cross-chain message forgery.

The fundamental reason lies in Kelp DAO's rsETH bridging adapter between chains failing to conduct strict "source verification" of messages from the underlying cross-chain protocol. The hacker forged legitimate asset release instructions, luring Kelp's bridging contract to mistakenly believe that equivalent assets were locked on the source chain, thus executing the hacker's instructions by default, releasing $292 million worth of rsETH on the Ethereum mainnet.

About 46 minutes after the attack occurred, the Kelp DAO team activated an emergency pause mechanism. Although this action successfully intercepted two subsequent withdrawal attempts totaling 40,000 rsETH (approximately $100 million), nearly 20% of the circulating supply of rsETH (116,000 tokens) had already fallen into the hacker's hands.

Subsequently, the hacker deposited these rsETH into Aave V3 as collateral, borrowing a large amount of highly liquid wETH. Clearly, the hacker would not return this asset, and the collateral rsETH was generated from false minting without real underlying assets, which would result in Aave facing approximately $177 million in bad debt, likely to be borne by all Aave depositors.

The biggest issue in this process lies with the bridging contract of LayerZero. The LayerZero cross-chain contract used by Kelp DAO is configured as 1/1 DVN, known as a "single-signature" configuration, where a single validator can approve cross-chain messages, while the official documentation of LayerZero recommends a 2/2 configuration by default.

After the incident, the LayerZero token ZRO fell by over 40%, Aave token AAVE dropped by more than 22%, and the Kernel token associated with Kelp DAO is currently down over 13%. Additionally, several projects, including Solv, announced the suspension of LayerZero OFT bridging.

Systemic Collapse of DeFi's "Lego Structure"

Before this incident, Aave had never experienced any security issues. Although this incident was not caused by a problem with its own contract code, it is still related to the protocol's risk assessment and isolation settings for such LRT tokens. In January of this year, Spark Protocol had delisted low-usage assets like rsETH and continued to tighten collateral and functionality, which kept the protocol unaffected during this turmoil.

Currently, Aave's total on-chain locked amount has rapidly dropped from $26.39 billion yesterday to $21.76 billion, with a single-day withdrawal amount reaching $4.6 billion. At the same time, many lending users have turned to other lending protocols, with high demand for ETH lending in the market, causing Spark's ETH pool deposit rate to quickly rise from 1.7% to 5%.

In response to this incident, Curve founder Michael Egorov stated that this event highlights the risks brought by the widely adopted "non-isolated lending" model. This model has good scalability but higher risks, making risk management crucial. One approach is to adopt a fully isolated model like that of Curve Finance's market, while another is to use a hybrid model (complex but feasible). However, the market has yet to fully understand the advantages of these solutions. Aave v4's Hub and Spoke model may be a step towards a semi-isolated and safer direction.

Currently, most mainstream lending protocols adopt a shared liquidity pool model, where almost all lending assets share liquidity and risk, such as Aave, Compound, and Spark. Only a few lending protocols like Morpho, Kamino, and Euler adopt an isolated lending pool model. This is essentially a trade-off between capital efficiency and security.

In the V4 version launched by Aave at the end of March this year, the concepts of Hub and Spoke were introduced. The Hub (central / Liquidity Hub) is the central liquidity hub responsible for holding all assets and global accounting. The Spoke (radiation) is a modular entry point for direct user interaction, responsible for specific lending rules and risk control.

Each Spoke provides specific lending functions (supply, borrowing, repayment, withdrawal) and has independent risk parameters: different collateral types, liquidation rules, interest rate models, E-Mode, Isolation Mode, RWA support, etc.

This means that Aave will be able to decide whether to establish fully isolated lending asset pools based on the specific circumstances of different assets with varying risks and characteristics, thereby controlling the systemic risks posed by single assets.

Additionally, well-known DeFi player benmo has put forward the following five points regarding this incident:

First, the security of packaged assets like LRT cannot be compared to that of native assets; lending platforms cannot treat these two types of collateral equally.

Second, L0 will lose part of the cross-chain market in the future; multiple assets like usde and usd0 have already stopped L0 cross-chain, and even if business resumes, the original credibility may be hard to restore.

Third, AAVE's reputation has been damaged; the safety of the unified lending market has re-entered the scrutiny phase of whales, and every additional collateral asset equally increases the risk of the original collateral assets, which is inherently unfair to native assets. V4 and modularization are trends in the development of lending products, and this transition process is likely to accelerate. Choosing lending business rather than lending platforms or curators, but the cost of this business is increasing.

Fourth, the cost of acquiring TVL in L2 will further increase, and the current TVL level will further flow back to L1.

Fifth, DeFi will stop its expansion route and return to a conservative and safe mode, further preventing scans by Anthropic Mythos.

From Drift to Kelp DAO, two significant security incidents within a short period show that the "nested" financial structure of DeFi means that any systemic collapse in one link can instantly evolve into a liquidity crisis across the entire industry. In the past, this viewpoint mainly existed in theory, with most security incidents' impacts remaining confined to individual protocols, but now this phenomenon has occurred in a tragic manner.

This is not only a judgment on cross-chain protocols and lending protocols but also a severe blow to user confidence.

"I am no longer participating in any DeFi, only holding native ETH, not engaging in any staking or deposits, not chasing a little interest," said well-known KOL laolu.

"Let's withdraw from DeFi first; it's too dangerous. This time the injury is much greater than Drift/Cowswap..." said well-known DeFi investor Dovey Wang, expressing a similar view.