Aave has officially resumed lending operations against wrapped Ether (WETH) across its decentralized finance protocol, signaling a critical milestone in the aftermath of the Kelp DAO security incident. Stani Kulechov, founder of Aave, confirmed on Sunday that loan-to-value (LTV) ratios for WETH have been restored to pre-incident levels on six specific networks: Aave V3 Ethereum Core, Ethereum Prime, Arbitrum, Base, Mantle, and Linea. This restoration enables users to once again utilize WETH for collateral and debt swaps, effectively reversing the precautionary freeze enacted alongside suspensions on rsETH and wrsETH reserves. The decision follows a governance proposal passed on Saturday, which determined that the demonstrated progress in the technical recovery plan allows for the lift of restrictions without compromising user protection.

This development represents the culmination of Phase II of the rsETH recovery strategy. The phase involved complex technical maneuvers to restore rsETH backing using Ether frozen post-exploit, supplemented by donated tokens from the DeFi United coalition, while simultaneously re-enabling withdrawal mechanisms. The urgency of these measures stems from a significant breach on April 18, where actors linked to North Korean state-backed entities exploited a LayerZero-powered bridge to steal 116,500 Kelp DAO Restaked Ether tokens. These stolen assets were subsequently used as collateral on Aave V3 to borrow WETH, generating approximately $195 million in bad debt for the protocol. Data compiled by Woofun AI indicates that the immediate market reaction saw Total Value Locked (TVL) on Aave plummet by over $8 billion, dropping from $23.5 billion in March to a low point before recovering to approximately $14.8 billion as of Monday.

Market dynamics following the incident reveal shifting liquidity patterns and borrowing incentives. Tom Wan, head of data at Entropy Advisors, noted a decline in deposits for wrapped stETH and wrapped Ether since the hack, yet highlighted a surplus of unused ETH liquidity within the system.

This shift has driven the annualized borrowing rate down to 1.9%, a level Wan suggests could reignite interest among traders pursuing leveraged ETH yield strategies. Woofun AI notes that ETH utilization has fallen below 90%, with wstETH and weETH deposits decreasing by $1.2 billion and $1.76 billion respectively. The restoration of profitability for wstETH/weETH to ETH loops now presents a strategic crossroads: whether capital will return to these loops or migrate to alternative platforms like Spark or Morpho.

Concurrently, Kelp DAO is executing its own recovery roadmap, focusing on network consolidation to enhance security standards for rsETH. The protocol announced plans to sunset rsETH bridging on select networks after June 15, including Optimism, HyperEVM, Unichain, Avalanche, and MegaETH. Post-deadline, the recovery of funds will incur a fee of 100 USDC per address. Earlier this month, Kelp DAO migrated its restaking token, rsETH, to the Chainlink oracle platform, maintaining its stance that the attack originated from vulnerabilities in LayerZero's cross-chain infrastructure, its former provider. Woofun AI analysis suggests that as these technical and operational adjustments stabilize, the broader DeFi ecosystem may see a gradual normalization of risk parameters, though the shadow of the $195 million loss remains a defining factor for future collateral policies.