Key Insights:
- Aave, KelpDAO, and other DeFi participants are requesting that Arbitrum release the frozen Ethereum.
- If approved, the frozen ETH worth over $71 million currently will make it into the ‘DeFi United’ fund.
- However, experts have criticized the lengthy process.
A group of decentralized finance participants, including Aave Labs and KelpDAO, called on the Arbitrum DAO to unfreeze $71 million in Ethereum. The proposal follows a major hack involving rsETH.
Aave, KelpDAO & Others Urge Arbitrum to Release Frozen Ethereum
For context, a $292 million attack hit KelpDAO early last week. The Arbitrum Security Council froze 30,765.67 ETH on April 21 in response to the attack and traced the funds to the hacker’s wallets. At press time, the ETH price stood at $2,317, which indicates that the frozen funds are worth just over $71.3 million.
Over the weekend, Aave service providers teamed up with EtherFi, LayerZero, and Compound to request the release of frozen funds in a governance proposal. The funds will be used to support a new “DeFi United” recovery plan. This initiative aims to restore the backing of rsETH and compensate users for their losses.
If successful, it said the funds would be used to assist in recovering the affected asset and reimburse users. The proposal would see the ETH moved to a 2-of-3 multisig wallet held by Aave, KelpDAO, and Certora.
The wallet would be dedicated solely to collecting funds for the recovery and to reinvest in the economic support of rsETH. The proposal states that the decision would come back to the DAO if the recovery fails to go ahead.
In a statement, KelpDAO highlighted the need for the action. The team added, “Every ETH released moves rsETH holders closer to whole.”
The proposal also provides details of the exploiter’s position in Aave markets. It states that the attacker provided 89,567 rsETH as collateral and borrowed 82,650 WETH and 821 wstETH on Ethereum Core and Arbitrum V3, respectively. Aave highlighted that its own smart contracts didn’t face a breach, but there was an external issue.
Experts Caution Against the Lengthy Proposal
While the KelpDAO-related proposal has widespread support, speed is becoming a major issue. Constitutional AIPs are the most significant action an Arbirtum community can take, and the process takes approximately 49 days. The steps include:
- A week of discussion on the forum
- An optional temperature check
- A 3-day voting delay
- 16 days of on-chain voting
- Multiple waiting periods on Layer 2 and Layer 1.
The length has led to complaints from some in the community. One delegate, Nicksta, suggested the delay may put traders with open positions at risk if funds are locked for that long. For his part, Griff Green urged a quicker process, proposing to hold a Snapshot vote “as soon as possible to validate the community’s intent.
Green also pointed to some other questions needing to be addressed amid the KelpDAO hack. These include the distribution of losses and what users can expect if the protocol is fully or partially recovered.
The deal contains a wide-ranging indemnification clause. Aave Labs would indemnify the Arbitrum Foundation, Offchain Labs, and council members against claims related to the freeze or release. The contract would be governed by New York law, and there would be no monetary limit.
If successful, the 30,766 ETH will mark the biggest donation to ‘DeFi United’ to date. Other pledges include 25,000 ETH from Aave’s DAO, 2,500 stETH from Lido, and 5,000 ETH from both EtherFi and Aave founder Stani Kulechov. Mantle has also offered a 30,000 ETH credit line to cover any remaining bad debt.