Aave WETH borrowing recovery restores LTVs and reopens WETH markets

Aave WETH borrowing recovery entered a new phase on May 18, with the lending protocol restoring wrapped Ether borrowing across affected markets after advancing the rsETH recovery plan tied to the Kelp DAO exploit. For users who rely on Ether-backed leverage, the move marks a return to more normal conditions after weeks of emergency restrictions.

The change is more than a parameter update. It reopens a core part of DeFi lending markets that had been partially shut down after attackers used stolen rsETH as collateral to borrow WETH on Aave V3, triggering one of the more painful knock-on effects in recent months.

Now, with rsETH backing restored and withdrawals reopened, Aave has rolled back those WETH limits. As a result, several major markets are back on pre-incident footing, and traders, borrowers, and liquidity providers have a clearer signal that the protocol’s technical recovery is moving forward.

Aave restores WETH borrowing across affected markets

Aave restored WETH borrowing across affected markets after advancing the rsETH recovery plan. Just as importantly for active users, WETH loan-to-value ratios returned to pre-incident levels across multiple Aave V3 markets.

Aave founder Stani Kulechov said the reset applied across Aave V3 Ethereum Core, Ethereum Prime, Arbitrum, Base, Mantle, and Linea. In practical terms, users can again borrow against WETH under the old settings, including through collateral swaps and debt swaps.

Why the Aave V3 loan-to-value reset matters

Loan-to-value ratios decide how much users can borrow against posted collateral. When those ratios are reduced, leverage gets harder and capital becomes less efficient. When they are restored, borrowing conditions loosen again.

That is why this Aave WETH borrowing recovery matters beyond one token pair. It affects how easily users can structure leveraged Ether positions and how much activity returns to Aave’s lending pools.

How the rsETH recovery reached this point

The restrictions were put in place after the April Kelp DAO rsETH exploit. As the fallout spread, Aave temporarily restricted WETH markets as a safety measure and froze rsETH and wrsETH reserves during the recovery process.

The latest rollback follows earlier steps in that process. rsETH backing was restored, withdrawals reopened, and a governance proposal passed on Saturday concluded that the WETH freeze could be lifted without weakening user protection.

The exploit and the response

The restoration of WETH loan-to-value ratios marks the final part of Phase II of the rsETH technical recovery plan. That gives the move added weight: it is not just a market tweak, but the closing step in a defined recovery stage.

It also shows how Aave handled the incident as a risk-management event first and a market-liquidity event second. Freezing reserves and tightening WETH conditions slowed user flexibility in the short term, but the goal was to contain further damage while teams worked through exposure and technical fixes.

What the Kelp DAO rsETH exploit changed for Aave and Kelp

The recovery effort began after hackers stole 116,500 Kelp DAO Restaked Ether tokens on April 18 from a LayerZero-powered bridge. Those assets were then used as collateral on Aave V3 to borrow wrapped Ether, leaving about $195 million in reported bad debt on Aave.

That sequence explains why the incident reached beyond Kelp DAO itself. A bridge exploit quickly became a lending market shock, exposing how connected restaking assets, cross-chain systems, and DeFi borrowing markets have become.

Kelp has since reopened rsETH withdrawals and continued restoring bridge functionality. It has also said rsETH remains backed across mainnet and layer-2 networks as remaining tranches are sent to refill the lockbox.

Another change is coming after June 15, when Kelp plans to sunset rsETH bridging on several networks, including Optimism, HyperEVM, Unichain, Avalanche, and MegaETH. After that date, recovery of funds will cost 100 USDC per address.

Kelp also moved rsETH to Chainlink oracle infrastructure earlier this month while continuing to attribute the attack to its previous LayerZero-based cross-chain setup.

Market effects and what comes next for DeFi lending markets

The immediate significance of the Aave WETH borrowing recovery is simple: borrowing against WETH is easier again. The broader significance is that it could revive Ether-based looping strategies at a moment when borrowing costs have dropped sharply.

Market reports cited Aave TVL at about $14.8 billion, down from about $23.5 billion in March. At the same time, ETH utilization has fallen below 90%, and the annualized borrowing rate has dropped to about 1.9%.

That combination matters because cheaper borrowing can make leveraged Ether trades attractive again for some users. These strategies often involve depositing liquid staking or restaking assets, borrowing ETH, and repeating the cycle to increase yield exposure.

There is also a competitive angle. If Aave’s risk settings normalize while rates stay low, some capital may return to those strategies on Aave rather than flow elsewhere. However, rival DeFi lending markets such as Spark and Morpho are still part of the equation, especially if users remain cautious after the exploit.

Aave’s recovery, then, is not just about restoring a market setting. It is a test of whether confidence comes back with it. If users see the rsETH episode as contained, lower WETH borrowing costs could help pull dormant leverage back into the protocol. If not, the reopening may simply make it easier for capital to choose its next home.