On April 18, the story did not begin with Aave. The starting point is further away: the LayerZero rsETH cross-chain/bridge path of the Kelp protocol was attacked, and the attackers created rsETH without real collateral support through the channel used to transport assets in this application. These "conjured" tokens belonged to a security incident concerning Kelp and the cross-chain environment, but soon flowed into larger scenarios via the pipelines already laid out by DeFi.

After the cross-chain event, the uncollateralized rsETH was transferred to multiple chains and entered the related markets of Aave V3, appearing prominently in lending positions. To external users, they looked indistinguishable from normal rsETH, yet on the books, they opened a potential bad debt door for Aave—once the “hollow” nature of these assets was fully exposed, the protocol might need to fill a hole that should not have existed with real money. This is a typical risk transmission: the source of the incident was not in Aave, but through the coupling of liquid staking and cross-chain bridges, it ultimately burdened Aave's balance sheet.

Aave's first response was self-preservation. After the event was exposed, the protocol urgently froze rsETH and wrsETH in the V3 market, trying to use technical means to create a closed interval for the risk and prevent more uncollateralized assets from continuing to be used as available collateral. However, freezing can only slow the bleeding; it does not answer a more practical question: if these uncollateralized rsETH ultimately turn into real bad debts, who will foot the bill? What order should the payments come in, and what should they come after?

Coincidentally, before this storm hit, Aave was carrying out what seemed like an unrelated plan—to buy back AAVE tokens from the market as part of treasury or ecological use. On April 19, without any formal governance vote, this buyback was quietly put on hold at the operational level. On the surface, this was a technical adjustment at the execution level; in essence, it foreshadowed a more difficult choice: when the protocol might need to reserve firefighting funds for external incidents on one hand, and has an established token buyback plan on the other, where should the “bullets” in the treasury be directed first?

On April 27, TokenLogic, which provides service for Aave DAO, gave their answer. They submitted an ARFC proposal on the governance forum and Snapshot, recommending a formal pause on the AAVE buyback plan—escalating what had already "effectively stopped" into a binding governance decision. The rationale for the proposal was clear and direct: given the unclear impact and potential losses of the rsETH incident, the DAO needed to prioritize dealing with risks related to rsETH, reserving enough treasury funds and decision-making flexibility for potential risk handling. The buyback could wait a bit, but if the treasury were first spent on the buyback, it would be very difficult to have enough firepower to deal with the unknown black hole after that.

As of April 27, this ARFC proposal to pause the buyback was still in the public discussion and governance process stage, with no final voting result produced. The scale of the numeric loss remained ambiguous, but the reality was already clear: a cross-chain attack originating from Kelp and LayerZero pushed uncollateralized rsETH into Aave V3, extending the freeze from the technical contract level into the realm of governance choices. Every expenditure “bullet” around Aave’s treasury was no longer just a simple token economic design, but an open judgment on the priority order of “protect the protocol's safety first, or fulfill the buyback promise first.”

The Bridge Attacked: How Uncollateralized rsETH Flooded into Aave

Before the story pressed onto Aave's books, the chain on the blockchain had silently lined up.
rsETH itself was not part of Aave's design, but a liquid staking token issued by the Kelp protocol; to deliver this token to users on different chains, Kelp relied on the cross-chain/bridge path offered by LayerZero. For Aave, the rsETH appearing in its V3 market was just a standard asset contract address, and the path from Kelp to LayerZero and then to multiple chains was the "outsourced" credit basis—once this path encountered trouble, the risk would hit Aave's balance sheet in the form of an external input.

On April 18, 2026, the problem erupted along this external path: Kelp's LayerZero rsETH cross-chain/bridge route was attacked, and attackers generated uncollateralized rsETH assets along this conduit. On the surface, these rsETH appeared identical to normally minted ones; the difference was that the latter corresponded to real staking positions, while the former was backed by nothing, and the word "collateral" had become ineffective outside of contract logic.

Next, the attackers bridged this batch of uncollateralized rsETH across multiple chains along the same infrastructure. After the cross-chain was completed, all downstream protocols—including Aave V3—saw only an influx of wallet balances and token transfers: part was deposited into Aave V3's rsETH market, starting lending positions as collateral; another part was borrowed out or created exposures in related markets. Aave identified the token contracts and would not distinguish which rsETH came from normal staking and which came from the breached bridge; external security incidents were thus accepted as "normal liquidity" at the interface layer.

From the perspective of the lending market mechanism, the scenario of “uncollateralized assets mingling in the collateral pool” is the most typical bad debt engine:
● The protocol assumes that every rsETH is backed by real assets, so it sets collateral ratios and liquidation parameters based on this assumption;
● When the attacker uses uncollateralized rsETH as collateral to borrow other high-quality assets, Aave's books record it as "an apparently safe over-collateralized loan";
● Once the market begins to question the value of rsETH, or the liquidation mechanism cannot fully cover the losses amid price volatility, the collateralized rsETH will no longer be sufficient to cover the asset shortfall, and the difference will directly settle as bad debt on the protocol layer.

More troublingly, the mix in the pool involves not just a single position but a network of assets spread across multiple chains and accounts. This means that bad debts do not appear in isolation, but could form a chain of losses transmitted to the protocol's capital base through a failure to liquidate, collateral discounting, and price feedback—ultimately landing on Aave's risk reserves and treasury.

Shortly after the incident was exposed, Aave, as a lending protocol, urgently froze rsETH and wrsETH in the V3 market, attempting to cut off the inflow of more uncollateralized assets at the entrance, confining the already formed risk within a controllable range. However, freezing can only halt new inflows; it does not erase the uncollateralized rsETH and their derived positions that have already entered the system. Next, how to handle these potential bad debts and who will bear the cost inevitably pointed to the treasury: whether every AAVE should still be used for buybacks or reserved to fill this black hole transmitted from the bridge, would become the crux of governance gamification that follows.

Buyback Emergency Brake: Aave Prioritizes Treasury Bullets

Before the rsETH incident, Aave's treasury had been methodically executing a buyback plan: using protocol revenue and a portion of disposable assets from the treasury to repurchase AAVE from the secondary market, then uniformly allocating it for treasury or ecological uses. For many DAOs, such buybacks serve as market signals to "support price" and a means of gradually consolidating governance rights scattered in outside circulation, reserving bargaining chips for future decision-making. A single source claimed that under this plan, over 244,000 AAVE have been repurchased cumulatively, accounting for about 1.52% of the total supply; however, this number remains unverifiable and should not be treated as a final conclusion.

A turning point emerged after April 18. The LayerZero rsETH cross-chain path of Kelp was breached, creating uncollateralized rsETH that gradually flowed into multiple chain markets in Aave V3, with position risks beginning to accumulate within the protocol. On the surface, Aave blocked new inflows by freezing the rsETH and wrsETH markets, but the uncollateralized positions already in the system could still evolve into bad debt amid future price fluctuations. Just one day after the event erupted—on April 19, 2026—a detail quietly occurred: the AAVE buyback plan was paused at the execution level, but no formal governance vote declared a "termination of the buyback." It felt more like an instinctive reaction: while the extent of the deficit was unclear, it was wise to hold on to the bullets at hand.

TokenLogic stepped in, bringing this "de facto pause" into the spotlight. As a service provider for Aave DAO, it submitted an ARFC proposal on April 27 at the governance forum and Snapshot, directly addressing the awkwardness of this situation: the treasury had stopped purchasing AAVE, but the buyback plan remained "open" in governance records. The core purpose of the proposal was to turn this gray area into a clear governance decision—no new buyback operations would resume prior to the community's formal vote.

The logic behind the proposal was straightforward: as the impact and potential losses of the rsETH incident remained unclear, every unit of liquidity in the treasury should prioritize "safety" over "market cap management." Public information has yet to provide an exact figure for Aave's losses in this incident, with only rough estimated ranges circulating in the community based on on-chain positions, all pending verification. Meanwhile, discussions were occurring in the community about whether to deploy treasury funds to reserve ammunition for possible bad debts, risk handling, or even industry-level rescue plans—though these rescue proposals are still merely hypothetical from a single external source and not formal decisions from Aave.

In this uncertain environment, the choice between buyback and firefighting becomes a straightforward question: continuing to exchange funds for AAVE per the original plan locks liquidity in the tokens they issue; if they need to pay for risks related to rsETH in the future, converting these AAVE back to cash will incur new discounts and time costs. TokenLogic's ARFC proposal chose to side with risk: it clearly suggested formalizing the pause on the buyback until it is clear how much black hole the uncollateralized rsETH would leave in the protocol, and whether the DAO would need to directly provide funds, keeping the treasury available as a firewall at all times.

As of April 27, 2026, this "pause the buyback" ARFC was still in the public discussion stage, and would next proceed through the usual Aave DAO governance process, entering Snapshot votes, ultimately decided by token holders. However, regardless of the voting results, a priority has already been written between the forum header and proposal body: in the face of risks triggered by external bridges and liquid staking protocols, and transmitted through rsETH, Aave would prefer to hold onto the treasury bullets first before discussing how to elevate the narrative of its own token.

Safety or Market Value: The Tug-of-War in Governance Forum

By opening this "formal pause on buyback" ARFC proposal, one can quickly sense the community's emotions split down the middle: one side views AAVE buybacks as a "shield against price drops," while the other sees every asset left in the treasury as the last line of defense against the rsETH black hole.

The faction supporting continued buybacks has very direct arguments:
In their view, Aave has faced external risks before, and what truly supports the protocol through cycles is the long-term brand and token price curve. "The more panic there is, the more the market should see the DAO is still executing the established buyback plan," such voices are not uncommon in Snapshot comment sections—they worry that once the buyback is stopped by a governance resolution, it will be read externally as: Aave itself is also uncertain about potential losses.
These holders continuously tie buybacks to a "confidence anchor": without stable secondary market expectations, who would be willing to vote for long-term governance later? They also reference past DeFi cases, emphasizing that cutting buybacks during crises resulted in a dual loss of token prices and community morale (typical governance experience analogy).

The opposition, however, closely follows another timeline: the bad debts have not been accurately calculated, the liquidation parameters are still being adjusted, and no one can provide a definite number for how large of a black hole uncollateralized rsETH will leave on the books.
The long posts in the forum reflect an amplification of this anxiety—some described buybacks as "turning on the fire hose in the garden without knowing how large the fire source is." They referred to the ARFC text's own logic: the buyback has effectively been paused since April 19; now it's just about formally bringing this reality into governance processes to clearly inform all stakeholders: the top priority for the treasury is dealing with the risks from the rsETH incident, not maintaining the secondary market curve (according to the current ARFC description).

The debate around treasury expenditure priorities quickly escalated from "whether to buy back" to "if not buying back, where should this money be spent."
Some mentioned that Aave might need to provide some form of risk compensation for bad debts within the protocol, or participate in an industry-level joint rescue to prevent the chain reaction of rsETH from tearing apart more DeFi legos— for example, a single source claimed that it was proposed within the community to provide compensation funding equivalent to 25,000 ETH for a rescue plan named "DeFi United" (this claim is currently from a single source and has not undergone multiple independent confirmations and should be considered as unverified information).
There is also a single source mentioning that Aave might provide funding support to restore rsETH's collateral capabilities to help related positions return to normal operation, but this plan similarly has not been verified by multiple parties (pending verification). In the face of these still unsubstantiated expenditure options, the stance of "holding onto the bullets" is more easily recognized by risk-sensitive participants.

For those insisting on the buyback, these potential expenditures are sources of new concern: if the DAO were to make significant treasury expenditures for a rescue or compensation in the future, would that mean giving up the long-term token value for a one-time "hole-filling project"? A single source estimated potential bad debts ranging from hundreds of millions of dollars (pending verification), and as these figures are reiterated, questions about "how much future growth to exchange for a short-term patch" have been laid on the table.

The game around treasury priorities also adds a more practical governance question: who will make the final decision.
A single source pointed out that Aave has previously experienced much higher external attention than on-chain voting rates, with some votes only having about 5%-10% of governance rights participating (pending verification). In a crisis of the magnitude of the rsETH incident, this means that a small group of major holders and proxies could sway the direction of "preserving safety" versus "preserving market value." Thus, within the comments of the forum and Snapshot, there exists an atmosphere of mutual questioning: some demand, "don’t let those who have not borne the risk decide not to buy back for everyone"; others counter, "the ones truly bearing the risk are the protocol itself, not short-term funds hoping to rebound through buybacks."

All these pulls ultimately condense into those few lines in the ARFC: pause the buyback, and not preset a recovery time, prioritizing the treasury's liquidity for risk disposal due to the rsETH incident. Support and opposition votes have not yet landed their final results on-chain, but this debate has already clearly outlined a new dividing line—in a world where risks can be transmitted through cross-chain and liquid staking, should DeFi protocols prioritize maintaining their safety boundaries first, or stabilize the price narrative of their tokens first.

The Aftermath of rsETH: Bad Debts, Liquidation, and the Shadow of Credibility

The voting at the governance level is just the surface of the story; what truly determines Aave's fate is the string of numbers deep in the books: how these uncollateralized rsETH will ultimately morph into a "hole" that no one wants to take on.

Mechanically, the uncollateralized rsETH evolving into bad debt within the Aave system may follow a few possible pathways:

● The first pathway is "false collateral, true borrowing." The attacker uses rsETH lacking real backing as collateral to borrow the best liquidity assets across multiple V3 markets. Everything appears to operate normally until it gets discovered—price oracles validate the value of rsETH, and the positions seem healthy.
Once the incident is exposed, Aave freezes rsETH and wrsETH markets, stopping new borrowing, but those already borrowed assets, if the corresponding rsETH ultimately deemed as zero or near-zero value, will leave the protocol with "negative equity": the books show outstanding loans but no equivalent collateral can be retrieved; this difference becomes potential bad debt.

● The second pathway is "liquidation cannot keep up, prices malfunction first." In extreme cases, if there is a sharp discount in the rsETH market (even if it doesn't immediately hit zero), a slight misalignment among oracle prices, market liquidity, and liquidation bots can cause some positions to miss the optimal liquidation window—collateral values drop below the liquidation threshold, but due to frozen markets, liquidity exhaustion, or participant hesitation, they cannot sell rsETH in time. By the time the system can process these positions, the recoverable values could be far below the nominal value of the borrowed assets, also resulting in bad debts.

● The third pathway leans more towards governance choices: even if technically a "forced liquidation" can be done on accounts holding uncollateralized rsETH, the protocol and community could waver between user protection and strict enforcement of rules. If the intensity of reclaiming efforts is relaxed to avoid "collateral damage" to uninformed users, or a certain threshold of protection is set for victims, some losses that could have been recouped through rigid liquidation may be consciously "socialized," remaining on the protocol’s balance sheet.

The commonality among these pathways is that as long as some borrowed assets cannot be fully recovered through disposing of collateral, the difference will fall on the protocol, turning into bad debts that need time and resources to fill.
However, as of April 27, 2026, no public sources have provided an exact figure for the losses resulting from the rsETH incident within the Aave system—this remains the biggest unknown in this debate.
A single source attempted to estimate the potential bad debt range between $123.7 million to $230.1 million, but this figure has yet to receive multiple independent verification and cannot be used as conclusive data; it should be considered a reference guess for the community to assess risk scales, not an "answer."

In the absence of a clear scale of bad debts, the only series of risk disposal actions that Aave can and must take, rather than immediately committing to "fill the holes."

The most direct action is to continue "stem the bleeding" through risk parameters and market structure:

● Aave has frozen the rsETH and wrsETH markets to prevent new uncollateralized assets from continuing to enter the system, effectively outlining existing risks with a closed contour, avoiding further spread to more positions.
● In subsequent governance, adjusting relevant assets' LTVs, liquidation thresholds, borrowing limits, or even completely isolating asset pools will be conventional options: leveraging stricter parameters to hedge against the tail risks of future similar events, making it hard for external protocol risks to easily penetrate Aave’s "core liquidity layer."

A more controversial layer is whether to utilize the treasury to "foot the bill."
Mechanically, Aave's treasury can, through governance resolutions, be used for buying back tokens or ecological incentives, and can also serve as a buffer for bad debts in special moments—using resources accumulated by the protocol to fill funding gaps arising from extreme events.
Currently, the proposal to pause the buyback of AAVE has clearly included "reserving treasury flexibility for risk disposal related to rsETH" in its rationale, but this is merely paving the way for a series of possible choices, rather than a pre-announced guarantee that "the protocol will definitely save."

Various ideas have emerged regarding how to utilize this money, but most remain at the level of single-point messages and community discussions. A single source claims that Aave DAO has been proposed to provide compensation funding of about 25,000 ETH to a rescue plan named "DeFi United," and another source mentions that the DAO might provide funding support to restore rsETH collateral capabilities—these statements have not yet been sufficiently confirmed through multiple channels and can only be marked as "pending verification."
Until the governance process has been completed, it is difficult for the outside world to know where Aave will draw the line between "protecting the treasury, preventing moral hazard" and "using real money to restore user confidence."

How to use the treasury is a game of利益 allocation; behind this game lies a long-term issue of credibility between multiple parties.

In this chain connection, the rsETH issued by Kelp, the LayerZero carrying cross-chain path, and Aave as the lending hub have been forcibly tied to a risk chain.
From a purely technical perspective, the source of the attack lies in the cross-chain/bridge path formed by Kelp and LayerZero, from which uncollateralized rsETH was created and then flowed into multiple Aave V3 markets.
A single source claims that Aave's official emphasized that its core smart contracts themselves were not attacked; this statement is still under verification. However, even if that is true, for ordinary users, there is not such a clear distinction between "the code is not problematic" and "my position is affected": what they see are frozen assets, potential losses, and a series of external dependencies they cannot control.

For Aave, the reputational damage from this incident does not necessarily arise from a vulnerability, but rather from the filtering mechanism that "allowed external risks to land within the protocol": how to assess and list cross-chain assets, how to set risk control parameters for liquid staking assets, and how to preserve buffers while deeply coupling protocols.
For Kelp and LayerZero, the security label of rsETH and its cross-chain paths has been questioned; whether being reconnected to Aave or to other lending and derivative protocols, they will likely face higher scrutiny, more conservative parameters, and even additional "security add-ons."

The wider DeFi ecosystem similarly cannot be detached: when an asset formed by liquid staking and cross-chain bridges can be massively leveraged as collateral on multiple chains, turning "other's risks into one's own black swan" is no longer an abstract metaphor, but a real case written on the chain.
The next time a protocol discusses whether to introduce a new type of cross-chain staking asset, the name rsETH is likely to be repeatedly mentioned—not only to revisit a safety incident but also to remind everyone: beneath the narrative of returns, those underlying risks, layered and far away, will ultimately come back to the books in one way or another.

A Bridge Crisis Forces DeFi Governance to Grow Up

In this rsETH incident triggered by Kelp and LayerZero's cross-chain paths, ultimately pressing down on Aave's books, what is truly on the table is not whether an asset is "high-quality," but for whom the DAO must be responsible in times of crisis. From April 19, Aave's buyback plan aimed at the secondary market was paused at the execution level, and on April 27, service provider TokenLogic propelled this matter into the governance process, wanting to turn the "de facto pause" into a binding collective resolution: until the scale of losses becomes clear, the treasury will no longer continue to create buy orders for market price, but will prioritize the disposal and buffering of rsETH-related risks.

The implications of this choice extend far beyond "temporarily halting the buyback." For mainstream lending protocols like Aave, the treasury has always been viewed as a tool for token economics: buybacks, incentives, and ecological investments all serve long-term narratives. This time, the DAO is forced to assume a more fundamental yet harsher role—when external cross-chain bridges and liquid staking protocols encounter problems, and uncollateralized rsETH flow in along asset whitelists and collateral paths, the treasury is first a firewall, not a price-supporting machine. Safety and solvency are explicitly prioritized over short-term token price management.

From a governance history perspective, this could become a long-quoted reference case. Over the past few years, most DeFi votes revolved around "whether to issue a little more or a little less" or "whether to whitelist this type of asset," and risk discussions often stayed at the parameter level; however, in this rsETH incident, Aave DAO faces more conflicting choices: retain cash ammunition in the face of uncertain potential bad debts, or continue executing the buyback to meet holder expectations. Regardless of whether the proposal to pause the buyback ultimately passes, it has etched a question into the governance template: when designing the treasury, buybacks, and risk buffer mechanisms in the future, it must be clearly stated under what conditions the protocol will unhesitatingly switch resources from price management to risk coverage.

This process of the cross-chain path being attacked, where uncollateralized assets spread across multiple chains and re-enter lending markets, also allows the concept of "interconnectedness" to emerge in the form of systemic risk for the first time. Asset whitelists are no longer merely growth switches but possibly determine whether an attack path can breach the entire ecosystem's defenses; the security assumptions around liquid staking assets and cross-chain bridges, once overturned by reality, result in not only losses for a single protocol but also a circle of bad debts and chain reaction expectations. It is foreseeable that mainstream lending protocols will be forced to reassess the types of assets they accept, collateral discounts, and liquidation parameters, incorporating cross-chain and liquid staking-related risks into more conservative models.

Moving forward, the nodes worth monitoring are already very clear. First, the direction of the current pause on the buyback ARFC in the governance process: in forum discussions and Snapshot votes, how will token holders weigh "price support" against "treasury security" and whether it will carry more institutionalized constraints on the future ratio of buybacks to risk reserves. Second, the follow-up handling of rsETH risks itself: how the scale of bad debts will be further quantified, whether there will be verified rescue or compensation plans, and whether Aave will choose to use treasury funds to participate. Third, the technical and industry-level echoes of this crisis—how Kelp and LayerZero will adjust their respective security architectures and cross-chain path designs, and how lending and trading protocols will reassess exposures to cross-chain and liquid staking in the next round of asset admission discussions.

When the chain of attacks involving rsETH eventually settles, it will not leave just a string of repaired contract addresses and an incident recap; more likely, it will leave a set of governance common sense that has been forced to grow up: in tightly coupled DeFi, behind every added return lies a debtor among protocols, and every DAO will inevitably have to make a clear choice between "pleasing current holders" and "insuring against future uncertainties." Aave's choice to first turn off the buyback valve and refocus on treasury security and risk disposal has already provided one answer.

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