The KelpDAO hack has had massive ramifications across the entire DeFi ecosystem
Episode by Peter Bui on April 21st, 2026
The KelpDAO exploit has become more than a single incident. In Peter’s breakdown, it’s a stress test for the wider DeFi stack, exposing how quickly liquidity can flee when one weak link is pulled. What started as a hack around a cross-chain setup quickly spread into a broader confidence shock across multiple protocols.
That matters because DeFi often sells itself on composability, but composability cuts both ways. When collateral, restaking, bridges, and lending pools are stacked on top of each other, one failure can cascade into many. This episode walks through the mechanics of that cascade, and why it has people rethinking bridge risk, verification design, and the real cost of chasing yield.
How the KelpDAO exploit spread
The core event was a reported exploit of KelpDAO that resulted in funds being siphoned through a forged cross-chain message. The episode describes the attacker as having exploited a weak configuration in LayerZero’s DVN setup, allowing a false withdrawal to be accepted. From there, the impact was not limited to one protocol.
As confidence broke, funds began leaving connected DeFi systems. Peter highlights that Aave was hit especially hard, with major outflows and concerns about bad debt adding pressure on the broader market. The result looked less like a normal hack and more like a bank run, where users rush for the exits before liquidity disappears.
Why one weak point can shake everything
The most important lesson here is not the size of the stolen amount, but the structure of the system around it. If a protocol relies on a fragile verification layer, then the entire trust model can wobble once that layer is compromised.
Peter explains the risk in plain language: if the security setup depends on only one verifier path, a single compromised node can become the point of failure. That is why the episode spends time on one-of-one, two-of-two, and higher-threshold designs. More verification redundancy means more resistance to spoofed messages and more resilience when something goes wrong.
What this means for DeFi users
For everyday users, the episode’s takeaway is simple, even if the system is complex. Stacked yield strategies can be powerful, but they also create layered dependencies. If you deposit into one protocol, restake into another, and then borrow against it in a third, you inherit risk from every layer in that chain.
That is why the video emphasises caution around bridges, restaking, and heavily composable setups. These systems can work beautifully when conditions are stable. When they are not, the unwind can be fast and brutal.
Cardano’s different approach
The episode also contrasts this with Cardano’s native staking model and the upcoming Bifrost bridge work from the Fluid Tokens team. The argument is not that Cardano is magically risk-free, but that its design choices can reduce single points of failure.
Peter points to a broader multi-signature and watcher-based approach as a meaningful difference from thin verification setups. In his view, that matters because decentralised systems should not quietly depend on a single fragile gatekeeper.
Why this story matters beyond one hack
The larger story is confidence. When users believe a system is secure, capital stays put. When that belief breaks, liquidity moves fast. The KelpDAO incident is a reminder that the DeFi stack is only as strong as its weakest assumption.
That is the real theme of the episode, not just “another hack,” but how trust, design, and user behaviour interact under pressure.
Key Takeaways
- The KelpDAO exploit triggered broader DeFi contagion, not just a single-protocol loss.
- Verification design matters, because one weak point can affect many connected systems.
- Stacked DeFi strategies increase exposure to cascading risk.
- Cardano’s native staking model avoids some bridge and contract dependencies.
- Confidence can leave the market as fast as liquidity does.
Disclaimer: This content is for educational purposes only. Nothing in this article constitutes financial advice. Always do your own research.
Text Transcript
Peter (00:00)
The KelpDao hack has had massive ramifications across the entire DeFi ecosystem, affecting so many protocols with essentially what’s a run on the bank on all these protocols trying to get their liquidity out. And it’s really bad for anyone that’s involved. I’m going to go through the details here of what actually happened and why all these protocols seem to be falling over and all this.
TVL this total value locked is Moving itself out of the defy protocols as quickly as possible. So let’s break down the details My name is Peter if it’s your first time here hit that thumbs up like subscribe notification bell I talk all things crypto in the space here and I’ll try and keep you guys up to date with everything So please hit that like button on your way in so let’s get into the breakdown here And this is the probably not the biggest hack this year
but it’s had the biggest ramifications. And let me go into why. So the KelpDAL here, where are the funds? KelpDAL had 293.7 stolen and attacked by an entity believed to be the Lazarus Group, and that’s linked to North Korea. The TakaForge cross-chain message by exploiting Layer 0’s DVN, Decentralized Verified Network, to fake a withdrawal of RS-ETH to Ethereum.
And we’ll go through and break down all that at the moment. But like I said, this is a contagion and has affected other protocols such as Aave. And Aave was hit hardest with a 9 billion of outflows, 33 % of the TVL gone, bad depth stacking up. And it’s the biggest hack still unfolding. So the hackers took that 200 and what was it? 293 million.
But because of that, it’s had this massive effect in all these different DeFi protocols with liquidity moving out and being drained. Crazy stuff, guys. You can see it more clearly here on DeFi Limer and all these protocols here. You can see the seven day change TVL 20, essentially just under 20%. And you go down to all these different chains, which are some way interconnected with each other. You can see them all dropping dramatically there.
Now, if you want to dig into the details, this is where things compound and spiral out of control. So are they got bad debt? Normal users were rushing in to withdraw their ETH and stables from that particular protocol. Also slammed with 100 % utilization and no one could get anything out. Stuck depositors realized they could still withdraw, but couldn’t withdraw, but could still borrow. They maxed out their
their credit yanking out as much stables as possible via loans. Lenders turned into leverage borrowers on a pool that already had a hole and risks borrowed higher and higher. So Wells Normies Treasuries pulled almost 8 billion from Arve and de-risked on other similar protocols. MoffoSky, Fluid, Camino, Camino, Camino.
bridge LST collateral is now radioactive in the eyes of serious money. So no one’s touching this at all. You can see here on this particular graph, the amount of USDT leaving Aave massive. So it was at just above 4.5 billion. Now it’s down to just over 2.6 billion. And it gets worse because like I said, all these other protocols, all these other ecosystems are also affected. And Arbitrum put out this announcement here.
The Arbitrum Security Council has taken emergency actions to freeze 30,766 ETH being held in their address there on Arbitrum 1 that’s connected to the Kelp DAO exploit. And they moved essentially, they moved that liquidity out from that address there as of April 20th, 11.26 PM Eastern Standard Time, the funds have been successfully transferred to an intermediary frozen wallet.
no longer accessible until the DAO decides what to do with it after that. So you think you’re playing around in a decentralized ecosystem here? You’re not. They could have moved these funds at any point in time that they wanted. They could have done anything with it. They could have stolen the funds even. This is not decentralization, not in the core aspect of how it should be.
Now I can do a big breakdown of the exploit here and let me just go to some of the highlights and probably more so into the security incident statement that on. And let me go through the layer zero incident statement and highlight a couple of things from here. the. So for those that don’t know.
Layer 0 is a messaging protocol that allows cross-chain liquidity to move from one ecosystem to another. Layer 0 is the intermediary that sits in between. So if you’re on Ethereum and you want to move something to Arbitrum, for example, you can use layer 0 to message between the two chains to say, hey, I’ve got some ether here on Ethereum. I want to move it to Arbitrum. And layer 0 is that intermediary in the middle that says, yes, this person signed a contract.
they can now have some created on Arbitrum or whatever other chain that Layer 0 is connected to. Now Layer 0 is connected to 80 plus different ecosystems and there’s a lot of liquidity that moves through Layer 0 in general. So that’s what Layer 0 is. Now a part of their setup is this DVN. It is a decentralized verified network and it’s essentially a node that these messages can pass through.
So sorry, decentralized verify networks. Now the setup that the KelpDAO had was a one of one setup, which means they just use one DVN to secure their network. So if that one DVN was compromised, like it was in this case, the compromised node could then have a forged message that said,
let’s mint all this fake ⁓ RS-ETH, which they did, then they DDoSed it so that no other messages could get through it. So the protocol just had to accept that fake forged message. And then thus the attackers, the hackers managed to forge the message and get their RS-ETH onto the protocol. So that’s essentially how it worked. Now, if the team there actually
set up the protocol in a different way instead of using a one of one DVN, used a two of two or three or three or even a five of seven DVN configuration, then that means you need that verified message to come from multiple different parties, multiple different DVNs, so that a message will be confirmed and then the protocol will actually release and mint those funds. So that is
the downside and the downfall of all of this. Now the two parties are blaming each other. So Kelp, DAO are blaming layer zero and their documentation saying that layer zero said that the one of one DVN configuration was perfectly fine and they could run with that. And technically, yeah, you could run with that because it works. But in terms of security, it doesn’t work because all we need is that one DVN exploited and compromised.
to take down various different protocols. Now this is where things get really, really scary. So this here is a post from June Analytics and they looked into how many OAPs out there that are using a simple one of one DVN as their security floor. There’s 47 different protocols, 47 % of all the protocols that use layer zero only use a one of one. So how many are there?
2665. So just under half of that, so 1300 or so protocols are using a one-of-one. That is a massive risk, people. We don’t know that. We don’t know what’s a security protocols, what setup all these protocols are using, but they’re using one-of-one setups and they could all fall and have a very similar attack to what we just saw here with the Kelp DAO.
So this is why everyone’s pooling their money out of DeFi. This is such a big risk. These bridge hacks, these exploits are massive. And if you have any sense, you would be moving your assets out at the moment to protect yourselves from potential losses. So if you look at this post further, 45 % run a two of two and just about 5 % run a three of three or higher. And I’ll be really looking to what protocols here
use a 3.3 or higher. You can see here on this other post that there are some other protocols. EtherFi uses 2, Athena uses 3, USDT0 uses a 2 signer, but KelpDAO 1. Crazy, isn’t it? Crazy. Now, in the Cardano ecosystem, I just want to bring this up here. So the Cardano ecosystem, we have a new bridge that’s coming on board called Bifrost. This is by the Fluid Tokens team, not
fluid in the sense of ETH, but fluid tokens. Now they have a very different multi-signature signing method where every transfer is jointly signed by approximately 300 to 400 Cardano staples plus a permissionless watcher anyone can run to block fraud. So this is a majorly different setup compared to what we see here on layer zero.
So layer zero had their own verify network and you only needed one single point of failure. The Cardano ecosystem took a much broader decentralized approach and require 300 to 400 Cardano staples to be signing these various messages to withdraw transactions. That’s a massive difference. To be able to hack this Bitcoin Cardano bridge, you need to compromise over 60
7 % of the pools. So that’s almost impossible. So if there’s Cardano state pools that are signing the messages here, you would need to compromise at least 300. Can you do that? Probably not. There’s decentralized nodes, there’s decentralized software behind this. Each one of them can run their own different versions of the Bifrost bridge as well, which is quite possible. So, you know, different designs
create different levels of security. And I’m so thankful that I’m in the Cardano ecosystem because I can have security like this.
Now, if you’re affected by this, do want to know, please leave a comment down below. Let me know how you are affected, what protocol you’re on. You don’t need to tell me how much you’ve lost, but I’d love to know some numbers from community members that are actually watching. But this is a massive compounding effect. And let me just give you a quick breakdown here. So users can, this is like a,
David Ramsey kind of thing where he gives financial advice online. And the user here is telling Dave how he is playing in the DeFi space. I’ll do the quick rundown here. So the person’s got ETH. So they used Lido to create staked ETH. They then took that staked ETH token receipt and then put it into a different protocol and restaked it on Eigen layer. And from Eigen layer, got a, ⁓ they didn’t want their
liquidity locked up. So then they took that restaked liquidity and put it into Kelp DAO and got the RS ETH and then took that to Aave where they could use it as collateral to borrow ETH and create this looping effect of borrowing and lending, which is absolutely insane. So this is the type of positions that people are taking so they can gain a little bit of return on each one of those steps in this massive loop.
And this is a type of risk that people are taking. Of course, if nothing falls over, it’s a massive return and hence people are attracted to that. And that’s why the defile layer on Ethereum is so high. In doing so, you have cascading effects when something, one point of failure, breaks and everything falls apart. So I am so, so thankful that I’m in the Cardano ecosystem where staking is native to the chain itself. You have liquid staking by default.
protocol has a liquid staking. So all you need to do is have Cardano ADA in your wallet, point it or delegate it to a particular stake pool, such as my own stake pool, ADA Oz. And from there, you earn your staking rewards. The ADA never leaves your wallet. It stays there as a native token within your wallet. It never goes to a smart contract or a bridge where those vulnerabilities actually happen. So I’m so thankful for that design.
But guys, please leave a comment down below. Let me know how you were affected by this. If you were affected and would you take these kind of risks ever again? Has this killed DeFi forever? It may very well have. If you enjoyed this content, if you learned something new, please leave a comment down below. You can also support me by YouTube memberships. The links down there as well. also have buy me a coffee links there. That’s a great way to fuel my coffee addiction and keep me going to make all these videos for you guys. But like always,
Hit that like, subscribe, notification bell. Stay positive guys, and I’ll see you in the next video.
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