Kelp DAO rsETH outflows near $300M; ZRO falls 18%

On Saturday Kelp DAO flagged nearly $300 million in rsETH outflows after detecting suspicious cross-chain activity. The DAO paused rsETH contracts and engaged security experts to investigate. The related token ZRO fell roughly 18%, moving from about $2 to $1.40. A leveraged long on HyperLiquid was partially liquidated during the price moves, costing that position about $2.88 million.

Major DeFi platforms moved to limit exposure. Aave V3 froze rsETH markets and SparkLend closed rsETH lending. Several vaults and yield strategies halted activity, including Fluid, Upshift’s High Growth ETH and Kelp Gain vaults, and Lido Earn’s Mellow meta-vault. Pendle’s PT and YT tokens, Compound, Euler and multiple strategies run by aggregators such as Beefy and Yearn were reported as using rsETH.

Security researchers flagged that rsETH had been moved between layer-2 networks via LayerZero bridges, raising concern that some bridged tokens may not have an immediate redemption path. On social channels Ignas called the incident “terrible due to extensive DeFi integrations” and said the full extent of exposure remains unclear because rsETH is embedded in many lending markets, yield strategies and leveraged positions.

Michael Bentley, former CEO of Euler Labs, wrote that rsETH on mainnet may still be backed but currently lacks liquidity to be sold and that paused contracts mean “there’s currently no usable redemption path either.” He ran a hypothetical spreading a $300 million loss across an estimated $1.6 billion of rsETH, which would place rsETH at roughly 81.25% of its prior value. Bentley noted such a revaluation could push large positions on Aave into undercollateralization and generate bad debt.

Market metrics showed strain. Aave ETH utilization reached 100% while borrowing costs rose to about 8.71%. Staked ETH yields were near 2.5%, and estimated net returns for some leveraged strategies ranged from roughly -6.2% to about -90% depending on leverage and position size. Bentley said that when liquidity is tight, normal unwind processes may not work at scale and traders could be forced to unwind positions in small steps, risking further equity loss and growth in bad debt.

Protocol teams are investigating and coordinating responses with security firms. On-chain flows and contract states are under review and the overall exposure remains a developing situation.