Judge Clears Aave Recovery Plan for Frozen ETH Linked to Lazarus Group

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• Aave confirmed progress in the rsETH exploit recovery plan.
• $71 million ETH frozen on Arbitrum may be transferred following a federal court order.
• Eight positions linked to the thief on Aave V3 were liquidated on May 6.
• Arbitrum DAO and Mantle DAO governance proposals passed in support of the recovery effort.
• Judge Margaret Garnett authorized an onchain governance vote while preserving legal claims tied to North Korea terrorism judgments.

Aave Details Progress in rsETH Recovery Plan

Aave published an update on the second phase of its rsETH incident recovery plan following the exploit linked to the DeFi United coalition recovery effort. According to Aave, eight identified positions connected to the thief on Aave V3 Ethereum Core and Arbitrum were liquidated on May 6. The recovered rsETH collateral was transferred to the Recovery Guardian under a previously approved Aave Improvement Proposal.

Aave stated that other users, including Umbrella stakers, were not affected during the liquidation process. The protocol also confirmed that governance proposals supporting the recovery effort were approved by both Mantle DAO and Arbitrum DAO. The Arbitrum proposal seeks to return approximately $71 million in ETH recovered by the Arbitrum Security Council for use in the broader recovery initiative.

The next phase of the recovery process includes burning the liquidated rsETH on Arbitrum and retiring the related LayerZero packet on Ethereum to prevent additional rsETH minting. Aave stated that these steps are intended to neutralize the inflated rsETH supply created during the exploit.

On Ethereum, the seized rsETH will be transferred to the bridge lockbox alongside ETH committed by the DeFi United coalition to restore the backing of the rsETH lockbox contract. Once restored, the bridge is expected to resume normal operations and rsETH withdrawals will reopen. Aave also said temporary market configuration changes introduced during the recovery process will be reverted, including restoring the loan-to-value ratio for WETH on Aave V3 Ethereum Core.

Federal Judge Approves Governance Vote for Frozen ETH Transfer

A Manhattan federal judge cleared the way for the recovery effort to continue by allowing frozen ETH held on Arbitrum to be transferred through an onchain governance vote.

Judge Margaret Garnett issued a two-page order authorizing Arbitrum DAO participants to move the immobilized ETH to a wallet controlled by Aave LLC. The order also stated that individuals who initiate, vote on, or participate in the transfer would not violate the restraining notice previously served on Arbitrum DAO. The restraining notice was filed after plaintiffs holding unpaid terrorism judgments against North Korea sought to restrain the frozen ETH. The plaintiffs argued that the exploit had been widely attributed to Lazarus Group, which they linked to North Korea.

Aave LLC filed an emergency motion seeking to vacate the restraining notice. During a May 6 hearing, the court reviewed arguments from both sides before accepting Aave LLC’s proposal to transfer the ETH while preserving the restraining order and related claims.

“The judge accepted Aave LLC’s proposal, issuing an order authorizing an onchain Arbitrum DAO vote to move the immobilized ETH to Aave LLC, with the restraining order to follow and attach to Aave LLC upon transfer.”

The ruling followed an earlier Snapshot temperature check in which Arbitrum delegates signaled support for returning the frozen ETH as part of the coordinated recovery effort. A separate binding onchain governance vote is still required for the transfer to proceed.

Broader Legal Actions Linked to North Korea-Related Crypto Activity

The legal action involving Arbitrum is part of a broader effort by plaintiffs representing terrorism judgment creditors to pursue assets allegedly connected to North Korean-linked crypto activity.

In a separate lawsuit filed in January, many of the same plaintiffs sued Railgun DAO, alleging the protocol allowed North Korean actors to move funds connected to prior cyberattacks. The complaint also named Digital Currency Group, citing its purchase of Railgun governance tokens in 2022. In March, the plaintiffs requested a Washington federal court clerk to enter default against Railgun DAO after alleging the protocol failed to respond to the complaint. The plaintiffs also moved in February to secure USDT that the U.S. government had sought to seize through a forfeiture motion.

FAQs

1. What is the rsETH recovery plan?
The rsETH recovery plan is a coordinated effort involving Aave, Arbitrum DAO, Mantle DAO, and other participants to restore the backing of rsETH following the exploit.

2. Why was $71 million ETH frozen on Arbitrum?
The ETH was immobilized as part of the recovery process after the exploit linked to rsETH and the broader DeFi United recovery effort.

3. What did Judge Margaret Garnett approve?
The judge authorized an onchain governance vote that would allow Arbitrum DAO participants to transfer the frozen ETH to a wallet controlled by Aave LLC.

4. What happens next in the Aave rsETH recovery process?
The next steps include burning the liquidated rsETH, restoring lockbox backing on Ethereum, reopening withdrawals, and reverting temporary market configuration changes on Aave.