Ad-Hoc Update (Apr 20 ‘26)
On April 18th, Kelp’s rsETH OFT was exploited via a forged message through LayerZero, allowing an attacker to release 116,500 rsETH from the mainnet bridge without any tokens being burned on other chains. rsETH pool backing is made up of ETH, ETHX, and stETH, and remains unchanged, but 116,500 unbacked claims now circulate. Most stolen tokens have already been deposited into Aave on mainnet and Arbitrum as collateral. Kelp maintains the backing for ~513K rsETH with an outstanding float of ~630K rsETH, implying a ~17.5% shortfall.
Neither the TM portfolio nor the wider DAO treasury currently has direct exposure to the abovementioned incident. ~3.5K wstETH was withdrawn from Aave on Arbitrum by the ATMC shortly after the exploit was identified and subsequently flagged by Entropy Advisors, while kpk derisked by withdrawing funds from Sky Protocol and Spark at the ATMC’s request.
The Arbitrum Network has a total supply of 65,826.16 rsETH with 62,283.42 rsETH concentrated in Aave and smaller amounts in Pendle, Compound, and other DeFi protocols. The Kelp team has discretion on how to socialize the shortfall and can adopt any of several vectors. Right now, the three most widely discussed scenarios seem to be as follows:
Scenario 1: rsETH on mainnet deemed 100% backed, OFTs effectively 0%. Class-split resolution that treats the forged OFT issuance as the locus of the shortfall. Arbitrum organic rsETH holders lose everything; Aave Arbitrum books the full loan amount against rsETH as bad debt, translating to ~$130M according to Chaos Labs, while Aave mainnet is left largely whole.
Scenario 2: Pro-rata socialized losses with ~82.5% of per-unit value retained/~17.5% haircut across all rsETH. Every holder takes the same haircut regardless of venue or relationship. This outcome would roughly translate to bad debt of $10M on Aave on Arbitrum.
Scenario 3: Senior / junior split via external council. Counterparties with pre-existing relationships (custodians, large integrators, specific venues) negotiate make-whole terms; unrepresented DeFi holders absorb the concentrated residual. Outcome for Arbitrum mainly depends on where Aave (and more specifically, its Arbitrum deployment) is seated at that table.
It’s worth noting that recent similar shortfalls (Stream, Resolv, Elixir) appear to have taken the resolve via external-council triage route, where counterparties with prior relationships have senior rights while unrepresented holders in DeFi absorb the residual (scenario 3).
Entropy is advocating Kelp to redeem rsETH/wrsETH pari passu, no matter on which blockchain the assets live.
Lastly, we want to highlight the Arbitrum Foundation’s speed and professionalism as it relates to the emergency actions that took place over the weekend. The AF serves as the custodian of the ATMC’s assets, which helped ensure the DAO did not incur any losses as the situation unfolded.