Darius Baruo
May 18, 2026 04:56
Aave reopens WETH borrowing, marking progress in recovery from the $195M Kelp DAO exploit that caused an $8B TVL drop.
Aave, one of DeFi’s largest lending protocols, has restored borrowing for wrapped Ether (WETH) across all affected networks following its response to the $195 million exploit tied to Kelp DAO. This development marks a significant step in Aave’s recovery plan after the exploit triggered a freeze on multiple markets and wiped out over $8 billion in total value locked (TVL).
The freeze, enacted on April 18, 2026, was a precautionary measure after hackers allegedly linked to North Korean state-backed actors exploited Kelp DAO’s LayerZero-powered bridge. The attackers stole 116,500 Restaked Ether (rsETH) tokens and used them as collateral on Aave V3 to borrow WETH, resulting in massive bad debt. Aave’s TVL dipped from $23.5 billion in March to $14.8 billion as of May 18, per DefiLlama.
Stani Kulechov, Aave’s founder, confirmed on May 17 that loan-to-value (LTV) ratios for WETH have been restored to pre-incident levels across key networks, including Ethereum Core, Arbitrum, Base, and Mantle. “Users can now borrow against WETH again, including through collateral and debt swaps,” Kulechov posted on X (formerly Twitter).
DeFi Liquidity and Borrowing Costs Adjust
While Aave has reopened WETH borrowing, the broader DeFi ecosystem is still recalibrating. Total deposits of wrapped staked Ether (wstETH) and wrapped Ether (WETH) have declined by $1.2 billion and $1.76 billion respectively since the exploit, according to Tom Wan, head of data at Entropy Advisors. However, Wan noted that Ether utilization has dropped below 90%, and borrowing rates have fallen to 1.9% annualized, which could entice traders back into leveraged ETH yield strategies.
More broadly, Ether (ETH) is trading at $2,120.24 as of May 18, down 3.09% in the past 24 hours, with a market capitalization of $254.8 billion. Sentiment around ETH remains cautious. Analysts warn of potential downside risks, with some projecting a further 20% drop in price due to macroeconomic and technical pressures.
Kelp DAO’s Recovery Efforts
Kelp DAO, the protocol at the center of the exploit, is also taking steps to recover. It announced plans to discontinue rsETH bridging on several smaller networks—such as Optimism, Avalanche, and MegaETH—by June 15 to enhance security. After this deadline, users will incur a 100 USDC fee per address to recover their funds.
Earlier this month, Kelp DAO migrated its restaking token (rsETH) to Chainlink’s oracle platform, citing failures in LayerZero’s cross-chain infrastructure during the attack. The DAO has also worked with the DeFi United coalition to restore rsETH backing and facilitate user withdrawals.
Significance for WETH and DeFi
WETH serves as a foundational asset in DeFi due to its compatibility with ERC-20 standards, enabling seamless integration with decentralized exchanges, lending protocols, and liquidity pools. The restored borrowing on Aave signals renewed stability for WETH markets, but traders remain wary. With $1.76 billion in lost WETH liquidity, the question now is whether capital will flow back to Aave or move to alternatives like Spark or Morpho.
For now, Aave’s recovery progress and lower borrowing costs could attract users seeking leveraged ETH strategies. However, the long-term impact of the Kelp DAO exploit on trust and liquidity in DeFi remains to be seen.
Image source: Shutterstock
