Aave has published two possible paths for handling the rsETH bad debt tied to the recent exploit, and the gap between them is substantial. Based on an assessment cited from LlamaRisk, a protocol-wide socialized loss model would leave Aave with roughly $124 million in bad debt, while an L2-isolation approach would push that figure to about $230.1 million. Aave DAO currently holds around $181 million in treasury reserves, so the second option would move beyond the treasury’s present capacity.
The issue traces back to April 18, when an attacker exploited a LayerZero V2 bridge flaw affecting Kelp and minted 116,500 rsETH without corresponding burns. That broke the asset backing assumptions behind rsETH and triggered collateral stress inside Aave. In its April 21 governance forum update, Aave formally presented the two resolution scenarios.
Protocol-wide loss sharing would imply a 15% depeg
Under the first scenario, losses would be spread across all rsETH holders across chains. LlamaRisk estimates that this would lead to a system-wide rsETH depeg of around 15%, leaving Aave with approximately $124 million in bad debt.
The trade-off is clear. The protocol’s loss would be lower, but holders on Ethereum mainnet who had no direct involvement with the affected L2 bridge exposure would still share the damage.
L2 isolation limits scope but raises the deficit
The second scenario aims to preserve Ethereum mainnet rsETH and contain losses to rsETH on L2 networks. On paper, that looks more targeted. The numbers point the other way. With a 73.54% haircut applied to bridged collateral, Aave’s estimated bad debt rises to roughly $230.1 million.
The shortfall would also be concentrated by chain. Mantle accounts for about 71.45% of the deficit, while Arbitrum represents roughly 26.67%. That makes the loss distribution narrower, but the protocol’s aggregate hit much larger.
Treasury reserves would fall short under the second option
The treasury math is central to the governance debate. Aave DAO’s reserves stand at about $181 million. That means the socialized-loss scenario could still be partially absorbed by the treasury, while the L2-isolation scenario would leave an uncovered gap of about $49 million even if the treasury were fully exhausted.
Aave said DAO service providers are already working with ecosystem participants to help cover the bad debt and that several preliminary commitments have been received. No figures or funding sources have been disclosed yet. The final decision is expected to go through Aave governance, with AAVE token holders set to determine how the loss is ultimately allocated.