Arbitrum has frozen over $71 million in ETH tied to the Kelp DAO exploit in a bid to mitigate losses.

According to a Tuesday update shared by Arbitrum, the network’s Security Council seized 30,766 ETH from an address on Arbitrum One linked to the weekend attack and transferred it into a frozen intermediary wallet.

Arbitrum said the action was carried out without disrupting the network or affecting user activity. The funds will remain locked unless governance approves any further steps.

“The Security Council acted with input from law enforcement as to the exploiter’s identity, and, at all times, weighed its commitment to the security and integrity of the Arbitrum community without impacting any Arbitrum users or applications,” the team said.

Saturday’s breach targeted Kelp DAO’s LayerZero-powered bridge, where attackers drained 116,500 rsETH valued at roughly $292 million, making it one of the largest DeFi exploits so far this year.

Preliminary findings from LayerZero pointed to North Korea’s Lazarus Group, with the attacker reportedly compromising RPC nodes used by the decentralized verified network. 

Two nodes were poisoned while a third was hit with a DDoS attack, allowing a fake cross-chain message to pass verification and mint rsETH illegitimately.

Part of those stolen assets later surfaced on Aave V3, where the exploiter deposited large amounts of rsETH as collateral to borrow wrapped ETH, raising concerns about potential bad debt across the protocol.

Kelp DAO said it acted quickly by pausing contracts and blacklisting wallets tied to the attacker, preventing an additional 40,000 rsETH, worth about $95 million, from being drained.

LayerZero has criticized Kelp DAO’s use of a 1-of-1 decentralized verified network configuration, arguing that it created a single point of failure without independent verification.

“LayerZero and other external parties previously communicated best practices around DVN diversification to Kelp DAO,” the firm said, adding that the project “chose to utilize a 1/1 DVN configuration.”

Kelp DAO pushed back, stating that the setup was not an independent decision but the default configuration provided.

“The 1-of-1 DVN setup is the configuration documented in LayerZero’s documentation and shipped as the default for any new OFT deployment,” Kelp said, adding that the arrangement had been “affirmatively confirmed as appropriate” during earlier discussions.

Separate risk assessments from Aave’s ecosystem partners outlined two possible outcomes depending on how losses are handled.

One scenario spreads losses across all rsETH holders across chains, leading to about $123.7 million in bad debt and a roughly 15% depeg from ETH. 

Another scenario isolates losses to layer 2 markets such as Arbitrum and Mantle, where the impact could climb to $230.1 million.

Aave noted that its treasury holds around $181 million, with additional backstops such as its Umbrella model available in certain cases. Still, the final outcome depends on how Kelp DAO accounts for the losses and adjusts its oracle pricing.

Pressure has already surfaced across the protocol, with close to $10 billion in value exiting Aave since the exploit.

As of the time of publication, Kelp DAO said it is still reviewing the incident and working with LayerZero, Aave, and other stakeholders on recovery plans and a path to safely resume operations.

The post Arbitrum freezes $71M ETH in Kelp DAO hack as DeFi fallout grows appeared first on Invezz

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