This is a category error. Leveraged rsETH users knowingly took liquidation and bridge risk; pure Linea ETH suppliers did not. Aave’s own report explicitly says the socialization boundary is still open and that the per-token impact changes by roughly 5x depending on whether losses are spread across all rsETH holders or only affected chains. It also says no official Kelp loss-allocation decision has been confirmed yet, and that Linea WETH remains frozen. So “the worst case is only 1.89%” is not a defense. It is just one hypothetical allocation of a loss that has not been fairly assigned yet. A smaller haircut is still a haircut, and it is still being pushed onto users who did not take the risk.
And no, this is not about “you might pay less on Linea than on Base.” That misses the point entirely. If another chain has a bigger TVL and a bigger loss, that still does not make it acceptable to dump losses onto innocent suppliers anywhere else. Different network, different pool, same principle: clean lenders did not sign up to underwrite other people’s leverage.
If the protocol thinks it is acceptable to merge gamblers and clean lenders into one loss bucket, then the product is mispriced and the yield is a joke. I supplied ETH for basic lending, not to underwrite other people’s leveraged rsETH exposure. That is exactly why the forum request explicitly asks to exclude pure ETH suppliers from haircut or socialized losses.
And let me remind you once again: DO NOT TRY TO SHIFT YOUR PERSONAL RISKS ONTO EVERYONE ELSE. IT WON’T WORK
The arguments you have in this thread will have zero impact on the outcome of this process. We’re trying to help you understand the counterparty risk you literally checked a box saying you understood when you chose to use Aave. If you end up losing money from this, you can try whatever avenues you want to get it back, but you should probably read the user agreement in its entirety at least once.
Maybe we can work through this in a different way by thinking through how this all works.
When you, an innocent lender, are generating yield from your deposits, who is paying that yield to you? Why do they pay you yield?
When someone deposits collateral that no longer has value, but they have withdrawn the loan you have given them, how do you get your money back?
If you can’t sell the collateral for enough value to recover the value of the loan, and the asset that an innocent lender provided is now missing, what do you not have enough of? Where will more of it come from?
Thanks for participating in this online discussion.
Scenario 1 only preserves L2 users from more loss. It shakes the faith of all uninvolved lenders, and greatly expands KelpDAO’s legal liabilities. Instead of a clear, clean loss to manage, they would have to make DISCRETIONARY decisions on how much to depeg, when to depeg, which users it impacts first, and that’s before mentioning the mainnet users incurring losses they have no responsibility for.
Frankly, they’d get sued into their next lives, and then sued more after reincarnation.
Keeping losses isolated to L2 users allows them to focus backstop funding and compensation efforts on JUST the affected userbase. They will have be to accountable for not more clearly communicating that L2 reETH is a separate asset class, but that’s a far smaller battle than intentionally causing losses to 80% of users who are the most canonical.
Without freezing the rsETH market during the initial period of panic, people with positions backed by rsETH would have been liquidated. Those liquidations would not have been enough to cover their ETH loans that were backed by rsETH deposits, meaning there would be a shortfall for ETH depositors. Without freezing the ETH markets, capital flight would have occurred potentially leaving a small set of users responsible for 100% of the bad debt.
Whether you understand it or not, you are a participant in rsETH’s ecosystem because you agreed to deposit your assets and lend them to people that used rsETH as collateral. This is the kind of counterparty risk you agreed that earns you yield.
Had Aave not frozen these markets, and the invisible hand was left to ‘figure it out,’ there would have been even greater losses for lenders, because the speculative value of rsETH dropped much lower than the actual underlying value. Most of you don’t understand you are being protected by this freeze.
RSETHwas compromised and used as collateral on aave. The RSETH collateral is up in the air if it’s going to get a haircut or not. We are currently waiting on Kelp to see if aave RSETH is going to get a haircut. Weth stakers are waiting to see what happens to Rseth is not weth staked responsibility
Yes, it is, because the asset that was borrowed was ETH, and that ETH is not fully backed by the collateral that was used to borrow it. That is exactly the kind of risk you signed up for as an umbrella staker.
Can you describe a condition where there would be an ETH shortfall otherwise?
I’ve been in the ecosystem for years and have watched the incompetence from AAVE Labs, along with the rigged votes, fake accounts and stealing from the DAO going on.
It’s fake accounts positing all sorts of nonsense because it is indeed a “category error”.
You absolutely can’t socialize losses on the people who did not go full degenerate and use all these Layer two’s with liquid staking, effectively taking on MASSIVE risk compared to the rest of us on main net.
They knew the risk they were taking, so they created all sorts of strategies to get as much APY% as possible through hugely risky liquid staking strategies.
There is no way option 1 is even being considered and that I promise you is undeniable.
The unfortunate thing here is that AAVE Labs will push whatever proposal they want through rigged votes anyways and it is in those situations that their truly astounding incompetence shines bright. Do not be surprised when they make the whole situation even worse through sheer incompetence.
The core debate here isn’t really about bridge risk it’s about who gets to rewrite the rules after the fact.
Kelp designed rsETH as a unified OFT supply with pari passu redemption rights. That’s not ambiguous. If they now reprice L2 rsETH differently, they’re not “applying bridge risk” they’re making a post-hoc decision to transfer value from L2 holders to L1 holders. That’s a governance and legal problem, not a technical one.
The more urgent governance question for Aave is this: pausing Umbrella sets a dangerous precedent. If the module that exists specifically to cover bad debt is paused at the exact moment bad debt materializes, future stakers will rightly price this as discretionary insurance not structural protection. That repricing will cost the protocol far more over time than any single activation event.
Act on Umbrella. Let Kelp own their legal obligation. Governance’s job is to protect depositors not wait for external parties to decide.
governance.
The only problem is on the side of RSETH aave has potential bad collateral in rseth. There is no problem with weth. Even though the hacker borrowed weth it doesn’t matter the fault is on RSETH. Weth stakers are waiting on Kelp to decide fate of RSETH makes no sense to weth stakers
Again, show us in their Terms of Service or other documentation, marketing, or public statements that affirm pari passu redemption rights. They implied it by association with L0’s OFT standard, but they did not ever guarantee it or even reference it.
The question is if a court of law would uphold the distinction. Based on Ripple vs SEC, the friction and sophistication of just being on an L2, and plausible deniability by Kelp, it’s very likely they would indeed recognize asset class distinction. This might have been different if L2 rsETH was minted off L2 ETH, like how USDC is setup, but the fact is L2 rsETH is an adapter escrow IOU, not a direct claim on the underlying asset.
@noisewar Your argument has a fundamental gap: you’re treating L2 rsETH as a separate asset. It isn’t. rsETH is an OFT with identical terms and pari passu redemption rights across all chains. Kelp never disclosed a backing difference between L1 and L2 — because there isn’t one. Retroactively isolating losses to L2 users is just as discretionary as Scenario 1, only directed at the smaller, less powerful user group.
And who actually has the clearer legal case? Not L1 users under Scenario 1 — they’d be sharing proportional risk of a token they voluntarily hold. It’s L2 users under Scenario 2: unequal treatment of an identical token, with zero prior disclosure of a backing distinction.
You’re also missing the game theory: Arbitrum is holding 30,766 frozen ETH. Under Scenario 2, Arbitrum has zero incentive to return that to Kelp — why send $71M to L1 holders who have no losses? Kelp loses its largest recovery position. Scenario 2 is actually more expensive for Kelp than Scenario 1. And the second-order effects are worse: a protocol that refuses ownership and pushes losses onto its most vulnerable users will never have its token listed as valid collateral again. No lending platform would take that risk.
Pablo is right: no user bears responsibility here. Not L1, not L2. Finger-pointing and hypothetical scenario-drawing doesn’t help anyone. A lot of innocent people are affected and what’s needed now are solutions — clear actions and honest communication from the people in charge of these three protocols. Stani set the right tone yesterday: “Our priority is our users, and every decision we are making is aimed at the best possible outcome for everyone involved. Pointing fingers is not something that gets us to the other side of this.” That’s the only path that preserves trust and long-term viability — for Aave, for Kelp, and for DeFi as a whole.
Hi everyone, hope you’re all okay after such a challenging situation. I’ve been following this case closely as I had my ETH supplied on OP which I withdrew from Aave. Does anyone have an idea when this issue is expected to be resolved, or when Kelp will decide which scenario to go for? seems there is a lack of communication on all parties re what’s happening. Thanks
I don’t care about game theory. Irrelevant to legal liability.
Re: asset distinction, L2 rsETH redemption requires an adapter escrow mechanic, and absolutely can be considered a separate class, if not by users then by courts. See Ripple vs SEC, courts ruled that fungibility alone is not enough to define asset class, and the mechanics mattered more than the marketing. Specifically, that meant that buying XRP on L2 would not count the token as a security, even if it were fungible with XRP anywhere else. This precedent, while not an exact fit (nothing ever is) is directly relevant to rsETH.
Y’all keep saying pari passu redemption rights over and over and no one has shown where it is affirmed by KelpDAO in writing.
And who actually has the clearer legal case? Not L1 users under Scenario 1 — they’d be sharing proportional risk of a token they voluntarily hold. It’s L2 users under Scenario 2: unequal treatment of an identical token, with zero prior disclosure of a backing distinction.
Read again what I said about DISCRETIONARY choices that must be made in Scenario 1. THAT is what creates huge unknown liabilities. Again, fungibility of the token does not automatically legally imply same asset class. The backing distinction was very well disclosed, they touted L0 OFT standard, it just isn’t binding the way they did it
I am not saying which scenario is better for rsETH users, they both have pros and cons. But Scenario 2 is significantly more defensible for Kelp in court. It MAY be worse for them as a protocol, you could be totally right. But this is an AAVE governance forum, it’s better for AAVE and its users, hence why we’re arguing for that here
rsETH holders need to make their case to KelpDAO, AAVE does not control their actions, and will survive whichever they choose.
Could we urge Kelp to make a decision as soon as possible? Until all of these issues are resolved, TVL continues to decline, which is hurting Aave DAO’s revenue and may already have caused losses greater than the bad debt itself. In this situation, we may need to explore options that do not depend on waiting for an external decision.
