DeFi falls into the most dangerous prisoner's dilemma in history

Author: Gu Yu, ChainCatcher

More than 40 hours after the theft, the chain reaction triggered by Kelp DAO is still fermenting, not only involving more and more well-known projects like Aave, LayerZero, Arbitrum, but even reaching the point where some popular narratives face a death sentence.

Well-known KOL Feng Wuxiang stated on the X platform that only ETH is safe now, and ARB has also authorized freezing and transferring customer assets. No L2 is truly an L2 anymore. L2 rose with Arbitrum, and it also perished with Arbitrum.

Another well-known KOL, Blue Fox, said that the biggest loss from this Kelp incident was not Aave, nor Kelp, but LayerZero — just because it was shortsighted and failed to see the true essence of the event. The core issue of this incident is not the disproof of L2 (even if it’s fake L2), but the disproof of cross-chain bridges.

An increasing number of fierce opinions are emerging in the public discourse, with parties involved each sticking to their own narratives and blaming each other, making the Kelp DAO theft a typical window into the debate over security responsibility, pragmatism versus technological fundamentalism.

1. L0 Disproved? Cross-Chain Bridges as the Biggest Loser

The key point of the incident is LayerZero’s detailed hacker attack report released yesterday, which preliminarily identifies the attacker as North Korea-backed Lazarus Group. The attack was carried out by poisoning its decentralized verification network (DVN) relying on downstream RPC infrastructure, controlling some RPC nodes and coordinating DDoS attacks to induce the system to switch to malicious nodes, thus forging cross-chain transactions.

“Using compromised nodes to poison RPC infrastructure, combined with DDoS attacks on unaffected RPCs to force failover, is very complex. Essentially, this is an infrastructure war,” said Samuel Tse, head of investment and partnerships at Animoca Brands.

At the end of the report, LayerZero stated that the protocol operated exactly as expected throughout the incident. No vulnerabilities were found in the protocol. The core feature of LayerZero’s architecture is modular security, and in this case, it perfectly achieved the intended goal by isolating the entire attack within a single application — the whole system had zero contagion risk, and other OFT or OApp were unaffected.

This complete disavowal of responsibility became the trigger for a huge public backlash, with many industry figures expressing dissatisfaction with LayerZero’s performance in this incident.

“L0 cleaned itself up completely, blaming all the issues on KelpDAO’s misconfiguration, and itself apparently had no problems. Incredible. Why is a 1/1 configuration allowed to exist? Why could the attacker get the internal RPC list? Why does the failover logic trust the polluted RPC directly after DDoS, without stopping verification or doing anything at all?” industry researcher CM questioned.

“This deliberate avoidance makes me very uncomfortable. The statement clearly says ‘protocol operated exactly as expected.’ The attack was described as RPC nodes being compromised and RPC poisoning. But RPC poisoning isn’t the case; their infrastructure was invaded and damaged. Since the statement doesn’t explain how the intrusion happened, I won’t rush to re-enable the bridge,” said DeFi developer banteg.

Kelp DAO also issued a statement, saying that the single validator (1/1) configuration that led to this attack was not their disregard for advice, but the default setting in LayerZero’s official guide, and the validator network (DVN) exploited by the attacker is LayerZero’s own infrastructure.

According to Dune’s analysis, among 2,665 LayerZero-based OApp contracts, 47% use the 1/1 DVN configuration, i.e., single validator mechanism, which greatly amplifies industry risk.

More frightening than the problem itself is that the parties involved refuse to admit fault or avoid responsibility. As the leading player in cross-chain communication and Layer0 narratives, hundreds of crypto projects rely on its infrastructure to bridge tokens and assets across different chains. If they continue to be arrogant, it will further undermine industry confidence.

Public opinion generally believes that LayerZero, although not directly hacked, has suffered the greatest reputation damage — it must pay the price for “allowing weak configurations,” or the cross-chain narrative will collapse.

In other words, LayerZero needs to propose clear technical improvements and also shoulder more responsibility in asset compensation schemes.

2. Is Layer2 Dead? Arbitrum’s Extraordinary Freeze

The discussion about Layer2 stems from Arbitrum’s freezing behavior. Today at noon, Arbitrum’s Security Council issued an announcement stating that it took emergency action to rescue 30,766 ETH stored in the Arbitrum One address, worth about $71 million.

Arbitrum also said that after extensive technical investigation and deliberation, the Security Council decided and executed a technical plan to transfer the funds to a safe location without affecting any other chain states or Arbitrum users. The original address holding the funds can no longer access them, and only the Arbitrum management can take further action to transfer these funds, which will be coordinated with relevant parties.

Industry analysts interpret that Arbitrum’s Security Council used a privileged state override transaction type (part of ArbOS, but rarely used), allowing the attacker’s private key to still sign transactions, but the ETH at that address was transferred by the chain itself.

This special transaction type completely bypassed the attacker’s private key, and only the chain itself (via sequencer / ArbOS upgrade path, controlled by Arbitrum’s Security Council) could inject such transactions.

It is known that the Arbitrum Security Council consists of 12 individuals elected by Arbitrum DAO, and any decision requires approval from 9 out of 12 members.

This has caused a huge stir. Previously, the outside world believed that Arbitrum, as a representative Layer2, lacked the ability and authority to handle user ETH assets — which is contrary to the decentralization spirit of blockchain.

In past hacking incidents, stolen USDT and USDC could often be frozen immediately by Tether and Circle to reduce user losses. ETH, as the native asset of the chain, has never been frozen or transferred by the chain itself before, exceeding most users’ expectations.

Many support Arbitrum’s approach, such as “All companies, banks, and formal financial institutions will eventually adopt secondary architecture. Operating like a centralized entity in critical moments is not a flaw but an advantage.” But many tech enthusiasts see it differently.

“No private keys, no authorization, just direct transfer.” In many opinions, Arbitrum’s move redefines the decentralization of Layer2, making users feel insecure about Layer2’s safety.

Blue Fox bluntly said that this incident directly touched the core ideological red line of DeFi: “Not Your Keys, Not Your Coins.” This event returns to the classic crypto dilemma: pragmatic security versus fully decentralized security.

Conclusion

When LayerZero claims “protocol operated exactly as expected,” it preserves technical correctness but loses public trust and reputation; when Arbitrum uses privileged transactions to transfer $71 million worth of ETH, it saves user funds but severely damages the decentralization narrative of Layer2.

The theft of Kelp pushes the two hottest narratives onto the stand simultaneously: Are cross-chain bridges infrastructure or risk amplifiers? Is Layer2 a reliable extension of Ethereum or a secondary bank disguised as decentralization?

LayerZero was compromised due to its single validator node mechanism, while Arbitrum used a centralized special voting mechanism to recover losses for LayerZero and Kelp DAO. This creates an extremely ironic closed loop: a protocol that claims decentralization collapses because of “single point vulnerability,” yet ultimately relies on another protocol’s “centralized privilege” to resolve the crisis.

It forces the entire industry to confront a question that has never been directly answered: when the ideal of decentralization clashes with the real-world security costs, which side are we willing to sacrifice?

The grand narrative debate remains a focus of public opinion, but user compensation schemes are another harsh reality. Even if Arbitrum recovers over $70 million through technical means, Aave still faces nearly $200 million in bad debt, raising questions about how user interests will be protected.

In most hacker incidents, losses of tens of millions of dollars are catastrophic for protocols, and user claims are often left unresolved. But this incident involves top projects like Aave and LayerZero, and their bad debt handling plans are highly scrutinized.

Today, Aave proposed two possible bad debt solutions: one is socializing the loss among all rsETH holders (sharing across the entire chain), with Kelp DAO applying an approximately 15% value haircut to all rsETH (mainnet + L2); the other is making only L2 rsETH holders bear all losses, while mainnet rsETH maintains its original value.

However, Kelp DAO and LayerZero have yet to discuss their roles in the compensation scheme. From LayerZero’s attempt to distance itself from responsibility in the report, it’s clear that the project believes that without responsibility, there is no obligation to compensate.

Yet, a multi-billion-dollar valuation protocol, relied upon by hundreds of projects as a foundational layer, choosing “technical exemption” in the face of massive losses caused by DVN default configuration is itself a huge irony of what “underlying infrastructure” means.

This is a classic prisoner’s dilemma: all parties in crisis try to minimize their own losses through “benefit slicing” rather than sharing responsibility to repair industry trust.

From the negative impact of this event on various industry parties, it will be the most dangerous prisoner’s dilemma in DeFi history.