A federal judge in New York has yet to reach a final decision on Aave’s emergency request to unfreeze $71 million in cryptocurrency linked to victims of the Kelp DAO hack, asking the involved parties for additional documentation due to insufficient detail in the initial filings.
Case background and perspectives
The legal dispute arose after decentralized finance platform Kelp DAO was targeted earlier this year in an attack that led to losses totaling approximately $293 million. The incident sent shockwaves through the crypto market, prompting the Aave team to petition for the release of $71 million worth of Ethereum (ETH) currently frozen by Arbitrum. Aave argued that continued locking of these assets could destabilize user balances and trigger a domino effect of damage across decentralized finance.
However, U.S.-based law firm Gerstein Harrow LLP soon entered the proceedings, claiming the funds on behalf of their clients and filing a formal objection against any release. Meanwhile, Aave maintained that their emergency appeal is vital to minimize further harm and restore stability.
Judge’s request for further evidence
Judge Margaret M. Garnett noted that Aave did not sufficiently explain how letting the freeze continue could dramatically worsen user losses. She allowed both sides an extra two weeks to provide more comprehensive statements and referenced the need for more detailed information in light of the case’s complexity and its potential consequences both for victims and for the market ecosystem.
The court, after reviewing the hastily prepared submissions, acknowledged that Aave LLC and its protocol users face short-term loss risks and, considering the complex facts at hand, requested further documentation to clarify the issues involved.
The court identified six central points to evaluate in the upcoming filings: whether the hack falls under New York’s protective statutes; the legal distinction between fraud and theft; the nature of interests in hacked assets; which legal system governs creditor priority; the applicability of “constructive trust” principles; and whether an equal distribution to victims is feasible. Final clarity is expected once these additional details are submitted.
Both Aave and Gerstein Harrow LLP are required to submit their new evidence by May 22, with a hearing scheduled for June 5 to determine next steps.
Restitution plan and developments at Kelp DAO
Following the Kelp DAO attack, the protocol suffered significant crypto losses. Aave and the Kelp DAO team have committed to jointly addressing the recovery of compromised rsETH assets, and any rsETH tokens still held by the hacker within the Arbitrum ecosystem were destroyed.
Of the nearly $278 million worth of tokens still unreturned, Aave has announced that repayments will be made to victims using its Recovery Guardian multisig wallet within two weeks. The involved smart contracts are set to be reactivated and normal operations resumed once compensation is complete.
The case has quickly become a case study in the DeFi industry regarding how hacks should be resolved and what legal frameworks govern the freezing and redistribution of stolen digital assets.
