Aave Labs has joined Kelp DAO, LayerZero, Ether.fi, and Compound in a constitutional proposal to the Arbitrum DAO, seeking the release of 30,765 ETH that had been frozen by the Arbitrum Security Council. The assets, valued in the source at roughly $71.5 million, would be sent into the DeFi United recovery plan, which is designed to help close the hole left by the Kelp incident. Aave estimates the full governance and execution process will take about 49 days.
Frozen ETH would move through a multisig before entering the recovery fund
Under the proposal, the ETH would first be transferred into a 2-of-3 Gnosis Safe managed by Aave, Kelp DAO, and Certora, then forwarded to DeFi United. Aave said the filing is a Constitutional AIP, the highest proposal tier in Arbitrum governance, which requires a temperature check, a 14-day onchain vote, L2-to-L1 message confirmation, and a final waiting period.
The ETH in question is the same tranche frozen last week after a 9-3 vote by the Arbitrum Security Council. According to Aave’s post on X, the funds came from the Kelp DAO hacker wallet and represent the last recoverable onchain assets left from the broader $293 million exploit.
DeFi United has confirmed $21 million so far, with about $215 million pending approvals
Data cited from a Dune Analytics dashboard shows that DeFi United had already received about $21 million by the time the proposal was submitted. Named contributors include Aave Labs CEO Stani Kulechov, contracts lead Emilio Frangella, Kelp DAO, Golem Foundation, BGD Labs, and Babylon.
Babylon Foundation has publicly backed the plan on X and said it has joined the contributor group. LayerZero, Ethena, Ink Foundation, and Frax Finance have also announced support. A larger pool of roughly $215 million remains subject to governance approval from entities including Arbitrum, Mantle, Ether.fi, and Lido. Arbitrum’s share is the same 30,765 ETH covered by the current proposal. If every commitment is finalized, the DeFi United recovery fund would exceed $236 million.
Aave added a safeguard in the proposal: if the recovery plan fails, funds are to be returned through the original route. Even a partial recovery, it said, would still narrow the deficit.
Aave is dealing with a sharp TVL drop and more than $190 million in bad debt
The urgency behind the coordinated effort is tied to Aave’s own exposure. In the week after the Kelp DAO incident, Aave’s TVL fell by nearly $12 billion as users pulled liquidity from the protocol.
The larger issue is more than $190 million in bad debt. The attacker used stolen rsETH as collateral on Aave to borrow large amounts of wETH. Once rsETH lost its peg and its price broke down, those positions turned into debt that Aave could not liquidate. For Aave, backing the recovery plan is tied directly to repairing protocol credibility and stabilizing capital conditions.
Asset freeze has reignited the debate over decentralization on Layer 2
The Security Council’s decision to freeze the ETH has also triggered a fresh argument over Arbitrum’s governance powers. Supporters of the move argue that if the attacker was linked to Lazarus Group or TraderTraitor, and the funds would likely be unrecoverable after laundering, intervention was justified. Taylor Monahan and samczsun were both cited in support of the freeze.
Critics are focused on the structure itself. In their view, a system where 9 votes from a 12-member council can freeze assets cuts against the decentralization claims often attached to Layer 2 networks. That tension is now out in the open, especially in a sector that has long leaned on the idea that code, not discretionary authority, should determine outcomes.
The 49-day governance clock is now running
The report says the attacker has already laundered another 75,700 ETH through THORChain and the privacy tool Umbra, converting the funds into BTC and moving them out of reach. That leaves the frozen 30,765 ETH on Arbitrum as the final recoverable piece of the incident.
If the proposal passes, the release of funds, the transfer into DeFi United, and the gradual repair of bad debt will all unfold through visible onchain governance actions. The vote now stands as a test of whether multi-protocol coordination can be used to absorb losses after a major DeFi exploit.