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.

More and more intense 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. Was L0 discredited? Cross-chain bridges become the biggest losers

The key point of the incident is LayerZero’s detailed hacker attack report released yesterday, which preliminarily identified 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 insiders 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?” questioned industry researcher CM.

“This deliberate avoidance attitude 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 responded, stating 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 that 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 the fact that the involved parties refuse to admit fault or evade 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 act arrogantly, it will further damage industry confidence.

Public opinion generally believes that, although LayerZero was not directly hacked, its reputation has suffered the most — 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 freeze action. Today at noon, Arbitrum’s Security Council issued a statement saying they took emergency measures to rescue 30,766 ETH stored in the Arbitrum One address, worth about $71 million.

Arbitrum also stated 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 state 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 from that address was transferred by the chain itself.

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

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

This 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 hacks, 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 key, no authorization, just a direct transfer.” In many opinions, Arbitrum’s move redefines the decentralization level 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 dilemma in crypto: 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 Kelp theft incident 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 a decentralized system?

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 answered directly: 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 practical concern. 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, making their bad debt handling plans highly scrutinized.

Today, Aave proposed two possible bad debt solutions: one, 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); two, only the rsETH holders on L2 bear all losses, while mainnet rsETH maintains its original value.

However, Kelp DAO and LayerZero have yet to discuss their roles in the compensation plan. From LayerZero’s attempt to distance itself in the report, it’s clear that the project believes it has no responsibility, and thus no obligation to compensate.

Yet, a multi-billion-dollar valuation protocol relied upon by hundreds of projects, which chooses “technical免责” in the face of huge losses caused by DVN default configuration, is itself a huge irony of the “underlying infrastructure” concept.

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

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