The $280M DeFi Exploit That Changes Crypto Forever | Dan Elitzer & Odysseus

**Odysseus** (0:00)
Security is not an issue in TratFi more than it is an issue in most other services because of the long settlement, right? You can go back, as we said, do a couple of meetings, pay a couple of millions or tens of millions, but you can fix the damage. In crypto, a hack is a physics event.
It's closer to an aerospace, right? Because if you have an issue in an airplane, people die. In crypto, okay, if you have an issue, people don't die, but it's still very severe, right? And you have these irreversible damage, and now we see like systemic even.

**SPEAKER_2** (0:39)
Bankless Nation, welcome to the podcast. We're here with Dan Elitzer from Nascent and also Odysseus from Phylax Systems. Guys, it's great to have you on, although the circumstances are not fantastic. We're talking about a hack today. How are you guys doing though?

**Dan Elitzer** (0:53)
Doing well. Thanks for having us.

**Odysseus** (0:55)
Thank you for having us, yes.

**SPEAKER_4** (0:57)
Let me give us a sit rep just so we can kind of just move forward through some of the details and then we'll kind of dive in a little bit deeper on some of the important details here. So, April 18th, we had a hack in DeFi, likely North Korea's Lazarus Group, it's kind of who everyone is assuming is behind this attack, exploited KelpDao's Layer powered bridge to create 116,000 RS ETH tokens. That is the restaked ETH token out of KelpDao without any backing. So, extra tokens minted, they then deposit those tokens into Aave V3 across Arbitrum and Ethereum mainnet to borrow $236 million in wheat. So, unbacked RS ETH tokens deposited into Aave allowed them to withdraw real ETH from the Aave system, leaving Aave with about $280 million in bad debt that it cannot recover.
As a result, some panic withdrawals have followed $5 billion in ETH outflows with Justin Sun pulling out $150 million just alone. In response to this attack, Aave paused the RS ETH markets and the WETH reserves across multiple chains just to kind of constrain the damage. Now it's got $180 million in bad debt. The TVL and Aave plunged from $26 billion to $17 billion kind of as like panic withdrawals happened. Interestingly, turn of events, the Arbitrum Security Council recovered $70 million in ETH in a pretty unprecedented violation of chain state, basically seizing the stolen assets by Dow governance vote, kind of opening up Pandora's box about what immutability means on layer twos. There are a ton of conversations that kind of sprawl out from this.
And kind of maybe just to add some context, this hack doesn't actually even break into the top 10 in terms of dollar value lost, but it seems that this hack is a top three, if not a number one hack in terms of just this significance of some of the implications of the future of the DeFi industry and the security of on-chain assets. Dan, I want you to check me in that statement and talk to me about why this event specifically, why this nature of this hack is so significant for the state of DeFi.

**Dan Elitzer** (3:05)
There's a number of reasons. I think one is that we're seeing such major protocols.
Kelp actually had a lot of value in it, but Layer is widely used across the ecosystem and Aave is frequently held up as one of the most trusted names in DeFi, obviously the largest in terms of TVL. And so to see them affected in this way by an exploit really shakes people. And I think it also is really significant because this is due to the composability that we've all been so excited about with DeFi. And here we're seeing the downsides of composability when you have not just ETH, but you've got like staked ETH in a liquid staking form, deposit to Eigenlayer. So it's restaked there. You've got a liquid restaking wrapper. You're bridging that to other chains. You're using this collateral.
You've got these levered loops going. There's just so many things happening here. And there's a lot of things that had to go wrong for us to be in this state. A lot of people have been playing the blame game, saying, like, you know, who's responsible here? And I think the answer is, if any of these parties had been more buttoned up, everybody from Kelp to Layer Zero to Aave to Aave borrowers, potentially even the EF, like, there's so many different places that you can point fingers. But if anybody had really, really done their job, the damage would have been less than it was.

**SPEAKER_4** (4:34)
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