Long-form Analysis: Industry Impact of the Aave Security Incident Conclusions First: 1. The L2 security narrative is broken. Previously, it was claimed that L2s offered the same security as the mainnet; now it’s clear that L2 rsETH must be sacrificed. 2. All ETH restaking narratives have collapsed. After layers of nesting via EigenLayer, users have realized that the purported yields (from staking as secure nodes for AVSs) are smaller than the risks introduced by the complexity. 3. DeFi is broken. It’s not dead entirely, but a massive contraction is inevitable. Users have realized that on-chain security issues are unavoidable—and platforms can simply walk away after losses (classic principal-agent risk). 4. There are definitely user losses. Kelp is broke and cannot afford to compensate. --------------------------------------------------------- We won’t rehash the detailed sequence of events—others have analyzed them thoroughly. In short: North Korean hackers compromised Kelp, then used LayerZero to cross-chain mint fake tokens and drain Aave’s treasury. Now, Kelp, LayerZero, and Aave are blaming each other over liability. 1. The L2 Security Narrative Previously, all L2s—whether Optimistic Rollups or ZK-Rollups—claimed security parity with Ethereum mainnet. Technically, this incident didn’t involve a breach of the L2’s consensus or sequencer. But users don’t care whether it was a bridge hack or an L2 outage—the result is the same: rsETH minted on L2s became worthless, while mainnet rsETH, untouched by cross-chain bridges, remained intact. Aave’s official response: “Mainnet rsETH is fully backed,” while freezing all WETH and rsETH markets on L2s including Arbitrum, Base, Mantle, and Linea. In other words: mainnet users and L2 users are unequal—L2 users have become second-class citizens. https://t.co/14aPSMvLlJ 2. All ETH Restaking Narratives Have Collapsed EigenLayer’s AVS (Actively Validated Services) security model: Two years in, no viable business model has emerged. Yes, EigenLayer claims revenue—but dig deeper and you’ll find most of it comes from Eigen token subsidies, similar to Filecoin: loud slogans, minimal real-world adoption, ultimately reduced to token sales. (“Here’s $4M in Eigen tokens, unlockable in two years—in exchange for you paying $1M upfront for EigenLayer services…”) For users, the Kelp incident revealed that the extra 2% APY from restaking doesn’t offset the risk. After all, the more layers you add, the higher the probability of failure. In extreme cases, returns are linear—but risks are exponential. 3. DeFi Is Broken The so-called “permissionless” nature of Web3 exists only in theory. Fundamental problems are unsolvable. Most DeFi protocols are essentially “code controlled by multisig wallets.” 1) Timeliness vs. Security: This is an unsolvable tension. Why are traditional bank transfers expensive and slow? Because security requires multiple layers of risk controls and manual reviews. (How often do you hear about someone’s bank account being stolen?) How do you implement this in DeFi? Can you realistically write all risk logic into smart contracts for public scrutiny? 2) Permissionless vs. AML Compliance: Like risk controls, AML rules are human-defined and trigger-based. You cannot have true permissionlessness and effective AML simultaneously—even AI-driven reviews rely on rules written by humans. Sure, you could say DeFi doesn’t need AML—but no major jurisdiction will accept that. We’re merely being tolerated for now. In the 21st century, financial transactions cannot escape AML compliance—it’s only a matter of time. 3) Human Factors Are Inevitable Most DeFi protocols are multisig-controlled code—and here’s why: a) Lending protocols: new assets, lending parameters, oracle configurations—all set and modifiable by humans. b) Most protocols are upgradeable; a stolen private key can wipe everything out—as happened with Drift. c) Frontends are controlled by teams: e.g., @pendle_fi, @Morpho—all can delist, hide, or flag markets as risky. Developer devices get hacked, supply chains poisoned, domains compromised (as recently with CoW Swap). Is there a pure Web3, ideal DeFi protocol? I can think of one: Tornado Cash—look where that got it. If you call that DeFi’s future, I have nothing more to say. 4) Misaligned Agent Risk When a Web3 protocol is hacked, developers and managers bear minimal loss—let alone criminal liability. Take the most obvious example: @arc (Circle’s L1 chain, parent of USDC) offers what reward for the highest-severity bug report? $5,000. https://t.co/OJ0Zo6KynS A top-tier vulnerability could cause hundreds of millions in losses—and the reward is $5K in USDC? That’s not rational—it’s insane. Why? Because the bounty comes from their own wallet; losses from hacks are borne by others. Compare this to traditional finance: - If hackers steal funds from a bank or bond firm, executives can face criminal charges for negligence. - China’s Level 3/4 Information Security Protection Standards classify financial data into five tiers with strict safeguards—critical accounting data must be regularly backed up to offline physical tape libraries or optical discs and stored异地 (offsite). What does DeFi have? No regulations whatsoever—just protocol goodwill. In the end, after all the twists and turns, users realize DeFi has simply become CeDeFi.When you’re making money, it’s xxx Lab collecting the funds; when you’re losing money, it’s DeFi—you didn’t do your own research. Yes, DeFi protocols can add time locks, various risk controls, audit delays, anti-money laundering measures, and even KYC (it’s inevitable). But after decorating shit with flowers, you realize it’s just becoming more and more like traditional finance. (Also, few institutional investors will enter an industry that gets hacked every few days—so stop fantasizing about institutional RWA narratives.) If you believe in Web3 narratives, you might as well believe communism will succeed. 4. This incident will definitely result in user losses. The industry consensus is that Kelp bears at least 40% of the responsibility. Aave and LayerZero may each compensate part of the loss, but they won’t cover Kelp’s share. The Kelp team is broke—they even dipped into their own funds to arbitrage during the rsETH depeg, blocking other users from redeeming their assets—essentially fighting users for pennies. Given the current situation, Kelp will most likely declare protocol closure or bankruptcy. There’s simply not enough money left—go ahead and sue if you can. So at least for Kelp’s own share of responsibility, users will bear the losses. I’ve also seen people tagging Sun, CZ, and others, begging them to ride in as white knights—yet they’re probably still asleep. Even Tether’s loan to Drift last time was just a smokescreen; wait until the compensation plan is announced—you’ll see, I already posted about this. In summary: this event simultaneously strikes down the L2 narrative, the restaking narrative, and trust in DeFi—making it a “narrative triple kill.” Later on, people may refer to April 2026 as Web3’s or DeFi’s “Black April” (and April still has 10 days left...). My advice: right now, stay away from DeFi—just keep your funds on exchanges earning interest.