KelpDAO hacked: Aave suffers nearly $200M in bad debt, Curve founder: Non-isolated lending carries high risk

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The biggest DeFi hack of 2026 has erupted: an attacker exploited the LayerZero cross-chain bridge to steal $292 million worth of rsETH, causing massive bad debt for Aave V3. Curve founder Michael Egorov immediately pointed to the "non-isolated lending" model as the root cause of the systemic risk. (Previous coverage: Kelp DAO rsETH cross-chain bridge hacked for $292 million! Triggering chain-reaction freezes on Aave and Compound) (Background: Aave V4 highlights: Introducing unified liquidity, fuzzy interest rates, new borrowing modules... self-built appchain not ruled out) At midnight today (19th), the hacker launched a precise attack on Kelp DAO's LayerZero cross-chain bridge, stealing 116,500 rsETH. Based on the market price at the time, this was worth approximately $290 million, accounting for about 18% of the total circulating supply of rsETH, making it the largest DeFi hack of 2026 to date. After stealing the rsETH, the attacker did not sell immediately. Instead, they deposited the assets into Aave V3 on the Ethereum mainnet and Arbitrum markets, using this batch of rsETH as collateral to borrow a large amount of ETH. Because the value of the pledged rsETH plummeted and liquidity dried up due to the attack, Aave incurred an estimated $170 million to $190 million in bad debt. Within hours of the incident, the Aave team froze all rsETH markets on V3 and V4. Protocols that use rsETH as collateral, such as SparkLend and Fluid, also followed suit and froze their markets. Aave has not yet officially explained how the bad debt will be handled, but it is expected that the reserve treasury assets will be used to fill the gap. There are also voices within the Aave community advocating that LayerZero should provide partial funding to support the recovery. Curve Finance founder Michael Egorov commented on X after the incident: "Phew hopefully Aave solves this. But this is the risk non-isolated lending which everyone loves has. Good scaling properties but higher risks -> risk management is the key (Aave was historically very good with it). It is possible to go fully isolated like markets on..." Egorov proposed two alternative paths: first, the "fully isolated model" adopted by Curve Finance, where each market operates independently, preventing risk contagion across pools; second, a more complex "hybrid model" that strikes a balance between scalability and security. Finally, he also affirmed the hub and spoke architecture of Aave V4, believing that this might be a step toward a "semi-isolated, safer direction." Phew hopefully @aave solves this. But this is the risk non-isolated lending which everyone loves has. Good scaling properties but higher risks -> risk management is the key (Aave was historically very good with it). It is possible to go fully isolated like markets on… https://t.co/EFVYtUw34f — Michael Egorov (@newmichwill) April 18, 2026 The hub and spoke architecture introduced by Aave V4 has a core concept of centralized and unified liquidity management, but risks are isolated in layers based on asset type: it retains the capital efficiency of large pools while limiting the spillover of risks from single high-risk assets. This incident has once again brought the debate over the architecture of DeFi lending protocols to the forefront: fully shared liquidity brings capital efficiency but exposes the entire system to the single-point risk of external protocols; while full isolation is safe, it sacrifices scalability. How to find a balance between the two will be a question that Aave V4 and the entire DeFi lending sector must answer.

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