Aave Development Team: Only Unfreezing WETH Reserves in Ethereum Core After rsETH Incident and Maintaining Zero LTV Ratio
The decentralized lending protocol Aave has released an update regarding the recent rsETH security incident, stating that the WETH reserves in the Ethereum mainnet Core V3 market have been unfrozen. Users can now redeposit WETH into the Ethereum Core V3 market, but for risk control reasons, the loan-to-value (LTV) ratio for WETH remains at 0. This means that WETH can be deposited to earn interest but cannot be used as collateral for borrowing. Meanwhile, Aave emphasizes that the WETH reserves in markets on Ethereum Prime and other chains such as Arbitrum, Base, Mantle, and Linea remain frozen, and the rsETH and wrsETH assets in those markets continue to be disabled. The protocol service provider and risk control team will continue to assess asset exposure and bad debt situations, coordinating subsequent disposal plans in the governance forum.
Previously, the Kelp DAO cross-chain bridge was attacked, resulting in approximately 116,500 rsETH (worth nearly $300 million) being stolen. The attacker deposited a large amount of rsETH into Aave V3 as collateral and borrowed a significant amount of WETH. As rsETH lost support in some scenarios, these positions became difficult to recover through regular liquidation, posing potential bad debt pressure on the Aave V3 WETH pool. This prompted Aave Guardian to urgently freeze markets related to rsETH and WETH reserves across multiple chains to prevent risk spread. Several English media outlets and on-chain analysis firms pointed out that this incident triggered a wave of concentrated withdrawals of over $5 billion in ETH and related assets from Aave, temporarily pushing the ETH utilization rate in some markets close to 100%, highlighting that cross-chain pledged assets have become a new source of systemic risk in DeFi.
Source: Public Information
ABAB AI Insight
This adjustment reflects Aave's delicate balance between "restoring liquidity" and "locking in credit risk": on one hand, completely freezing WETH would deprive the lending market of core asset supply, amplifying the liquidity crisis; on the other hand, allowing WETH to be used as collateral for borrowing in the presence of difficult-to-liquidate rsETH bad debts would shift the risk back onto new depositors. By only unfreezing WETH deposits on Ethereum Core V3 while maintaining the LTV at 0, the protocol structurally demotes WETH from "credit collateral" to "pure yield asset": users can enter to provide liquidity to the pool and earn interest, but cannot leverage WETH further. This helps repair market depth in the short term while locking existing bad debts within the original risk circle.
From a longer structural perspective, the Kelp DAO rsETH incident exposes the complex credit chain formed by the combination of "cross-chain + re-pledging + leverage" in DeFi. A token originally viewed as "anchoring ETH" was introduced as collateral into Aave via a cross-chain bridge and then used to borrow large amounts of WETH. Once a security incident occurs upstream with the bridge or issuer, downstream lending protocols are left holding "collateral with failed anchoring" that is difficult to dispose of, effectively creating bad debts. In this chain, Aave's smart contracts were not breached, but as a terminal liquidity provider, it still bears the risk consequences of the upstream bridge and re-pledging protocols. This indicates that the composability between DeFi protocols has transformed single-point risks into systemic credit issues: those who accept how much "second-layer, third-layer derivative assets" as collateral bear the corresponding structural tail risks.
Aave's choice to continue freezing WETH and rsETH across multiple chains while only partially unfreezing on the mainnet Core V3 reflects a more subtle stratification: the Ethereum mainnet is seen as the "core settlement layer" with the most concentrated risk assessment and governance, thus prioritizing the restoration of some functions to stabilize overall confidence; markets on L2 and sidechains bear a greater experimental and buffering role, being forced to remain frozen for the long term when risks are unclear. This will accelerate the return of borrowing and high-quality collateral demand to the mainnet, pushing networks like Arbitrum, Base, Mantle, and Linea more towards a "high yield, high risk" edge market positioning, weakening their voice in the "core liquidity pool".
On a deeper level, this incident is less about the risk control failure of individual protocols and more about the DeFi industry's still immature pricing mechanism for "collateral hierarchy and risk discounting". In traditional financial systems, assets with different ratings and legal statuses are strictly distinguished during pledging and re-pledging, and regulatory and liquidation mechanisms impose different constraints on different tiers of assets; however, in DeFi, as long as the technical interfaces are compatible, any new asset can enter the collateral pool at a discount rate similar to ETH. Aave's current actions of freezing, lowering LTV, and discussing DAO backing are essentially a passive reconstruction of a "collateral asset grading and risk tax rate" system: in the future, for cross-chain re-pledged assets to enter first-tier lending markets, they will likely require higher discounts, stricter whitelist evaluations, and even insurance and compensation arrangements; otherwise, similar credit events will continue to recur cyclically, dragging down the pricing of the entire DeFi yield-risk structure.