Aave announced it has restored WETH LTV (Loan-to-Value) to pre-incident levels on affected networks on May 17, marking a new milestone in its technical recovery plan following the exploit related to KelpDAO’s rsETH back in April. This move allows users to resume borrowing against WETH on Aave V3, including collateral swaps and debt swaps.
While this was not a direct hack on Aave, it demonstrates that the lending protocol can still be heavily impacted when an external collateral asset loses its backing or faces liquidity issues.
WETH Borrowing Returns Across Aave V3
According to an announcement on X from Aave, WETH LTV on Aave V3 Ethereum Core, Ethereum Prime, Arbitrum, Base, Mantle, and Linea has been restored to pre-incident levels. Aave CEO Stani Kulechov also confirmed that the next step in the rsETH recovery plan has been completed, and users can now borrow against WETH again on Aave.
The next step in the rsETH technical recovery plan has been completed with the restoration of WETH LTVs to their pre-incident levels across all affected networks. Users can now once again borrow against WETH on Aave, including through collateral and debt swaps. https://t.co/6BzxUtu3Ci
— Stani (@StaniKulechov) May 17, 2026
The restoration of LTV is crucial because WETH is a major collateral asset on Aave. When the LTV was reduced to 0 during the emergency phase, users could no longer use WETH to borrow other assets, disrupting ETH-based leverage strategies and position management.
Currently, WETH is operating normally again across the affected V3 deployments. This helps users resume collateralized borrowing strategies, debt management, and position adjustments after weeks of restrictions.
How the rsETH Incident Hit Aave
The incident stemmed from an exploit related to KelpDAO rsETH on April 18, which was not a direct smart contract flaw within Aave. The attacker used the affected rsETH as collateral to borrow real WETH/ETH, creating bad debt and forcing Aave to trigger its defense mechanisms.
After the incident was detected, Aave froze the reserves for rsETH and wrsETH and restricted WETH to prevent the risk from spreading. This was a necessary step to protect liquidity, but it also impacted users as demand for withdrawals and position restructuring surged.
Aave Total Volume Locked (TVL). Source: DefiLlama
According to DefiLlama, Aave’s TVL dropped sharply following the exploit and currently stands at around $14.4 billion, significantly lower than the $23.5 billion level seen in March. This trend shows that the market is not only reacting to bad debt, but is also repricing the risks of collateral assets with cross-chain and liquid restaking links.
Recovery Progress and Remaining Gap
On a positive note, the recovery process has shown clear progress. According to the governance proposal regarding the unfreezing of WETH and restoration of LTV, a total of 106,993 rsETH has been recovered from Aave V3 and Compound, with 89,567 rsETH coming from Aave and 17,426 rsETH from Compound. This figure is compared against an unbacked supply of approximately 112,103 rsETH on the affected L2s.
The remaining balance of over 5,000 rsETH is expected to be handled through ETH funds committed by DeFi United to cover bad debt in the affected markets. This provides Aave with the foundation to ease its defense measures without introducing major additional risks to users.
A noteworthy point is that the recovery process does not rely solely on standard liquidations. It involves coordination among Aave governance, Compound, KelpDAO, parties within DeFi United, and related recovery mechanisms. This demonstrates that the incident is not just an issue for an isolated lending pool, but a risk arising from a collateral asset losing backing across multiple layers of DeFi infrastructure.
Market Impact: Liquidity and AAVE Price
The restoration of WETH LTV helps lay the groundwork for borrowing activities on Aave to return to normal, especially for strategies using ETH as collateral. However, market reaction remains cautious, as capital flows have not yet shown strong signs of returning after the bad debt risk period.
AAVE price chart (D). Source: TradingView
The AAVE token is trading around $88 at the time of recording, down about 1.2% on the day. The price remains near its multi-month lows, significantly lower than the range above $170–$180 seen earlier this year. This indicates that the market does not view the restoration of WETH LTV as a strong bullish catalyst yet, but is instead waiting for further signals regarding the handling of the remaining bad debt and liquidity recovery in the affected markets.
Why This Matters for DeFi Risk
The rsETH event highlights that risks in DeFi lending do not solely originate from a protocol’s own smart contracts. Even when Aave is not directly exploited, an external collateral asset losing its backing can still generate bad debt and affect major lending pools.
For lending markets supporting LST/LRT collateral, the greatest risk lies in the collateral asset potentially losing liquidity or losing its backing before the protocol can react in time. Therefore, limits on accepted collateral amounts, maximum borrow ratios, and emergency pause processes will become increasingly vital factors in risk management.
What Comes Next for Aave
The next phase will depend on whether users return to the affected markets. If deposits recover, ETH utilization stabilizes, and borrow APYs do not spike abnormally, it will indicate that users are gradually accepting the risks post-incident.
Conversely, if liquidity remains thin or users only return in a limited capacity, the restoration of WETH LTV will have been just a technical recovery step. The rest still depends on the speed of bad debt resolution and Aave’s ability to keep the markets stable over the coming weeks.
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