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- Aave liquidated eight exploit-linked positions and recovered rsETH collateral.
- Legal disputes over $71 million in ETH are slowing the full repayment process.
- Aave plans to burn excess rsETH supply and gradually restore bridge operations.
Decentralized lending protocol Aave says its recovery process tied to the recent rsETH exploit has moved into Phase II, marking a major step toward restoring affected markets on Ethereum and Arbitrum.
The update follows the successful liquidation of eight Aave V3 positions connected to the exploit. According to the protocol, the recovered rsETH collateral was transferred to the Recovery Guardian after approval from the Aave DAO. Governance proposals backed by both Mantle DAO and Arbitrum DAO also passed, supporting the broader DeFi United recovery initiative.
Aave said regular users and Umbrella stakers were not harmed during the liquidation process.
Legal Dispute Delays Return of $71 Million in ETH
A central piece of the recovery effort involves roughly $71 million in ETH previously secured by Arbitrum’s Security Council. While the Arbitrum DAO approved returning those assets to impacted Aave users, the process became more complicated after plaintiffs with legal judgments against North Korea filed a restraining notice against the frozen funds.
To address the issue, Aave LLC submitted an emergency court motion requesting the notice be removed. During a May 6 hearing, the judge approved a structure allowing the ETH to be transferred to Aave LLC while keeping the restraining order attached to the funds during the ongoing legal proceedings.
Until the restricted ETH is fully released, Aave said separate borrowed funds will temporarily cover the remaining gap owed to users.
Aave Prepares to Burn rsETH Supply
The next stage of the recovery plan focuses on restoring full rsETH backing and resuming normal bridge functionality.
On Arbitrum, liquidated rsETH will be burned to eliminate excess supply created during the exploit. Meanwhile, Kelp plans to retire the associated LayerZero packet on Ethereum to prevent additional rsETH minting on the destination chain.
The seized rsETH on Ethereum will also be transferred into the bridge lockbox together with ETH pledged by members of the DeFi United coalition. Once the lockbox is fully backed again, bridge activity and rsETH withdrawals are expected to reopen gradually.
Emergency Measures Expected to Be Lifted
Aave confirmed that temporary safeguards introduced after the exploit are likely to be reversed as the recovery progresses. One of the major changes included setting WETH loan-to-value ratios to zero on Aave V3 Ethereum Core to reduce systemic risk during the incident.
Also Read: Aave Liquidates Kelp DAO Hacker Positions as $293M DeFi Recovery Nears Finish
The protocol now appears focused on stabilizing liquidity conditions and rebuilding confidence across affected markets as the recovery enters its next phase.
Aave’s handling of the rsETH exploit highlights the growing complexity of DeFi incident recovery, especially when legal systems, governance structures, and cross-chain infrastructure intersect. While significant progress has been made, the protocol still faces legal hurdles before all affected assets can be fully restored. Even so, the transition into Phase II signals that Aave is moving closer to reopening normal operations across Ethereum and Arbitrum.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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