New Aave risk framework proposed following KelpDAO exploit

Aave founder Stani Kulechov said Tuesday that a new risk framework has been proposed for the protocol, aiming to prevent repeats of the $290 million KelpDAO rsETH bridge exploit in April.

"Over the past several weeks, Aave has been developing a new risk framework that includes asset risk, bridging risk, chain risk, and advanced automation capabilities for risk management," Kulechov said in a social media post. "This framework establishes a new standard for how Aave assesses, monitors, and manages risk across the protocol."

Kulechov shared the proposal prepared and published by LlamaRisk, which is now open to being evaluated by the Aave governance community. Aave is one of the largest decentralized lending platforms in crypto.

The move to fortify risk management comes after the April exploit in which the LayerZero-powered cross-chain bridge Kelp DAO lost 116,500 rsETH tokens valued at around $292 million. The attack then spread to the Aave protocol, as the exploiter deposited a significant portion of the stolen assets into Aave V3. The attacker used rsETH as collateral to borrow substantial amounts of WETH, raising the risk of bad debt on the protocol.

The KelpDAO attack is one of the largest DeFi exploits so far this year. Key benefits from the new risk framework include stronger protections for depositors through more stringent asset reviews, bridge requirements, and automated monitoring. Additionally, in an effort to reduce contagion risk, troublesome assets can be more easily offboarded before problems spread, according to LlamaRisk.

"This framework sets the risk standard that governs every asset on Aave V3, V4, and Aave Horizon. It is binding at onboarding, at every quarterly due diligence refresh, at every material-change re-evaluation, and at every parameter or deprecation decision taken on a listed asset," LlamaRisk said in its proposal. "The requirements, evaluation points, and procedures below are to become the standard against which every listing and every parameter decision is measured once the framework is endorsed."

Kulechov said once the proposal passes, the framework will be applied across all markets and assets.

"Assets that do not qualify for the new standard will be off-boarded from Aave over the coming weeks," he added.