Saw an interesting breakdown from DefiLlama's 0xngmi on the Kelp DAO situation, and it really highlights how messy these protocol recovery scenarios can get. The rsETH incident has basically forced Aave into a corner with three drastically different paths forward, each with wildly different consequences.

First option: spread the pain evenly. If they go this route, we're talking about an 18.5% haircut for every rsETH holder across all Aave deployments. With roughly 666k rsETH in circulation and positions maxed out on leverage, the math gets brutal—about $216 million in bad debt. Umbrella ETH can absorb $55 million, Aave's treasury covers another $85 million, but that still leaves a $76 million gap. They'd have to either take on debt or liquidate $51 million worth of AAVE tokens to plug it.

Second scenario is basically sacrificing L2 users to save mainnet. Aave's sitting on about $359 million of rsETH supply, and if that's all borrowed at max LTV, you're looking at $341 million in pure bad debt. Umbrella can't touch this one. So Aave either bails out parts of the market selectively or just lets Arbitrum, Mantle, and Base collapse. Yeah, that's as brutal as it sounds.

Then there's option three—the "technically possible but practically impossible" route. The hackers pulled $124 million from mainnet and $18 million from Arbitrum. If they only compensate those specific loans, the shortfall after Umbrella coverage is around $91 million. The problem? The funds are already scattered everywhere, and the protocol can't actually distinguish between different depositors, so good luck executing that.

DefiLlama's analysis really underscores how constrained Aave's options are here. No matter which path they choose, someone's taking serious losses. This is exactly why protocol risk and concentration risk matter—when something breaks at scale, there's no clean way out.