Key Takeaways:
Lido Finance’s EarnETH vault has a 9% direct exposure to the restaking token rsETH after an exploit on KelpDAO on April 18 drained approximately $292 million from the protocol.
"Lido Earn contributors are working with the vault curators (Veda and Mellow) to resolve two distinct issues arising from the Kelp incident: direct exposure to rsETH, and an ongoing liquidity crunch on lending markets," Lido Finance said in a statement on X.
The security breach at KelpDAO, a liquid restaking protocol, involved an attacker forging a cross-chain message to mint 116,500 rsETH without burning the corresponding tokens on the source chain. This represented about 18% of the total circulating supply of rsETH at the time. The attacker then deposited the illicitly obtained rsETH into lending protocols and borrowed ETH against it, prompting risk managers to freeze rsETH markets to prevent further damage. Aave’s guardian froze rsETH and wrsETH markets across its deployments on Ethereum, Arbitrum, Base, Mantle, and Linea.
The incident highlights the contagion risk within the interconnected DeFi ecosystem, where a vulnerability in one protocol can trigger a cascade of protective measures and liquidity freezes across multiple platforms. The fallout has put pressure on looped staking strategies and created negative yields in some vaults, with recovery efforts now focused on tracing and freezing the stolen assets. Arbitrum's Security Council has already frozen approximately 30,766 ETH, valued at around $71 million, linked to the exploit.
Lido confirmed that its core staking products, stETH and wstETH, are unaffected by the incident. The protocol has paused deposits and withdrawals for the EarnETH vault while its curators, Veda and Mellow, work to reduce leverage and cut wETH debt within the affected strategies.
To mitigate potential losses for users, a $3 million first-loss protection fund from the Lido DAO treasury is in place. If the EarnETH vault realizes a loss, the DAO’s vault shares will be burned to absorb the financial impact. Lido also noted that a last-resort withdrawal path may be introduced, allowing users to exit early by accepting a maximum potential loss if the recovery process is prolonged.
The protocol’s DVV and EarnUSD vaults have no exposure to the KelpDAO issue. However, its GGV subvault, which utilizes looped staking strategies, is experiencing negative yields due to the spike in borrowing rates. Lido assured that users who requested withdrawals from the GGV subvault before the incident will have their redemptions processed at the pre-exploit valuation.
This article is for informational purposes only and does not constitute investment advice.
