Judge Delays Aave's Bid to Unfreeze $71M ETH from Kelp DAO Exploit
A New York judge has delayed a decision on Aave's emergency motion to unfreeze $71 million worth of Ether (ETH) tied to the $293 million Kelp DAO exploit, a significant DeFi theft attributed to North Korea's Lazarus Group. Judge Margaret M. Garnett has requested additional briefings from both Aave and the law firm Gerstein Harrow LLP, extending the process through at least June 5, 2026.
The frozen funds, which represent approximately one-quarter of the stolen assets, were locked by Arbitrum's Security Council on April 20 in an emergency action to prevent the attacker from moving the ETH further. Aave has argued that the frozen ETH is critical for mitigating user losses and stabilizing the DeFi ecosystem, warning of potential liquidations and broader market disruption if the assets remain inaccessible. However, Gerstein Harrow LLP, representing creditors claiming rights to the funds, has contested Aave's request, filing a restraining notice earlier this month.
Judge Seeks Specific Legal Clarifications
Judge Garnett outlined six key legal issues that require further clarification before she can rule on the matter. These include whether the transactions tied to the exploit fall under New York’s shelter principle, the distinction between fraud and theft in this context, and the legal framework governing creditor priority over the frozen ETH. The judge also asked whether a constructive trust could be applied and whether Aave or Arbitrum can identify individual victims to distribute the funds on a pro-rata basis.
Both parties have until May 22 to submit their supplemental briefs, with the next hearing scheduled for June 5. "The court recognizes the risk of potential near-term harm to Aave LLC and Aave Protocol users," Judge Garnett said, acknowledging the complexities of the case and its implications for both victims and protocol governance.
Broader Context and DeFi Market Impact
The Kelp DAO exploit, which occurred on April 18, exploited vulnerabilities in its cross-chain bridge powered by LayerZero, resulting in losses of nearly $293 million. The stolen funds were partially traced to Arbitrum, where 30,766 ETH (valued at $71 million at the time) were frozen. While the intervention by Arbitrum’s Security Council was praised for mitigating immediate losses, it also reignited debates over centralization in Layer 2 governance and the use of emergency multisig controls.
In the weeks following the hack, Aave and Kelp DAO have been coordinating recovery efforts. On May 10, Arbitrum DAO voted to release the frozen ETH, contingent on resolving the legal disputes. Meanwhile, Aave’s Recovery Guardian multisignature wallet is deploying funds to restore the backing of Kelp DAO’s liquid staking token (rsETH), with plans to fully reactivate related smart contracts in the coming weeks.
As of May 14, the value of ETH stands at $2,263.63, down 1.5% over the last 24 hours. While this legal battle unfolds, the outcome could set a precedent for how DeFi protocols and judicial systems handle stolen funds in the future.
The delay in unfreezing these funds adds uncertainty to an already volatile situation, leaving victims and market participants in limbo. Traders and stakeholders will closely watch the next developments, particularly the June 5 hearing, as any decision will likely ripple across both regulatory and DeFi governance frameworks.