A federal judge in Manhattan just cleared the way for Arbitrum DAO to move $71 million in recovered Ethereum tied to the April 18 Kelp DAO bridge hack. The Friday order lets the DAO hold its on-chain vote and ship the funds to Aave LLC. But the legal freeze follows the money, and that catch could decide who actually owns the ETH.
Judge Garnett Splits the Decision Down the Middle
Judge Margaret M. Garnett of the Southern District of New York signed a short two-page order on Friday. It modifies the restraining notice that had locked up 30,766 ETH inside Arbitrum DAO since May 1.
The ruling explicitly protects every voter, delegate, and on-chain participant from any liability tied to the transfer. No one taking part in the vote can be hit with a violation of the freeze.
But the judge stopped short of giving Aave everything it wanted. Aave LLC had asked the court to throw out the restraining notice entirely. As a backup, it requested that the plaintiffs post a $300 million bond.
Judge Garnett denied both. She landed on a middle path instead. Aave LLC agreed that once the ETH lands in its wallet, the freeze will follow the funds and apply to the company directly. The terror creditors keep their claim, and the court reserved decision on every other open issue.
In an X post Friday, Aave LLC said the amended Constitutional AIP preserves the recovery intent approved by Arbitrum DAO, and that the ETH remains directed toward the rsETH recovery effort.
Inside the $293 Million Kelp DAO Bridge Hack
The story starts on April 18. Attackers drained roughly $293 million in rsETH from Kelp DAO’s LayerZero-powered bridge. That was 116,500 rsETH lifted in a single move, or about 18 percent of the token’s circulating supply at the time.
This was not a smart contract bug. The attackers hit LayerZero’s off-chain verification layer. They compromised two RPC nodes, poisoned the data feeds, and then ran a DDoS attack to force the system onto the corrupted infrastructure.
LayerZero has pinned the operation on North Korea’s Lazarus Group, specifically the subgroup known as TraderTraitor. The protocol later issued a public apology and admitted it should never have allowed its DVN to act as the sole verifier for high-value transactions.
The fallout hit hard across the lending stack:
- Aave faced up to $230 million in bad debt from the exploit
- rsETH broke its peg across more than 20 networks
- SparkLend, Fluid, and Aave froze their rsETH markets within hours
- Kelp DAO migrated to Chainlink’s CCIP, dropping LayerZero’s OFT standard
Terror Victims, North Korea, and the $877 Million Claim
Three days after the hack, the Arbitrum Security Council froze 30,766 ETH it traced to the attackers. Then on May 1, a New York law firm called Gerstein Harrow LLP threw a wrench into the recovery plan.
The firm represents families holding terror judgments against North Korea and Iran. They argued that public attribution of the exploit to Lazarus Group makes the recovered ETH DPRK property, and therefore fair game for decades-old unpaid awards.
The numbers behind those judgments are massive. Three cases drive the legal theory:
| Case | Face Value |
|---|---|
| Kim v. DPRK | $330 million |
| Kaplan v. DPRK | $169 million |
| Calderon-Cardona v. DPRK | $378 million |
| Combined total | $877 million+ |
The legal hook rests on the Foreign Sovereign Immunities Act and the Terrorism Risk Insurance Act. Both laws let creditors of state sponsors of terrorism go after property held by the regime or its instruments.
Aave pushed back hard. The protocol called the legal theory shaky and warned it could chill every future DeFi recovery effort.
“These funds belong to the affected users they were stolen from, full stop,” said Aave founder Stani Kulechov.
Arbitrum Delegates Vote, DeFi United Closes the Gap
Governance has not waited for the courts. Arbitrum delegates voted to approve the release on Thursday, even before Friday’s order arrived.
The numbers were lopsided. 182.2 million ARB tokens voted yes, working out to roughly 91 percent of all voting power. That margin signals a delegate base that wants the money returned to users now.
The 30,766 ETH would be the single largest contribution to DeFi United so far. The recovery coalition, led by Aave Labs and Kelp, has now raised more than $320 million to plug the rsETH backing hole.
Major commitments include:
- 30,000 ETH from Consensys and Joseph Lubin
- A 30,000 ETH loan from Mantle
- 5,000 ETH personal donation from Stani Kulechov
- 2,500 stETH from Lido Finance
- Up to 5,000 ETH from EtherFi
- 10,000 ETH pledge from LayerZero Labs
On May 6, Aave liquidated all eight attacker positions across Ethereum and Arbitrum. The recovered collateral landed in a Recovery Guardian multisig wallet controlled through DeFi United, with no user funds touched and no emergency safety module activated.
What Happens Next for Aave Users and DeFi
The court’s ruling is procedural, not substantive. It clears the path for the on-chain vote, but the bigger fight remains wide open.
Even if the Arbitrum vote passes cleanly, the standard L2 to L1 withdrawal delay of roughly eight days gives the Manhattan court room to step in. Both sides have time to file fresh motions and reshape the field.
Galaxy Digital research puts DeFi United about 10 percent short of fully restoring rsETH backing. The frozen 30,766 ETH is the difference between closing that gap quickly or dragging the saga out for months.
For ordinary Aave and rsETH users, the message is mixed. The recovery plan is real, the money is flowing, and the protocol survived a hit that would have killed weaker projects. But the legal cloud is real too. If the terror creditors win, Aave could be forced to hand the ETH back over later.
The case is now one of the most watched legal fights in DeFi history. It tests how far American courts will reach into decentralized funds. It also tests whether on-chain governance can survive contact with old school litigation.
The April 18 exploit broke trust across half the DeFi stack, but the response has shown a side of crypto that rarely gets headlines. Builders, lenders, founders, and rival protocols stepped up to make strangers whole. Friday’s ruling does not end the fight, but it gives the people doing that work a real shot at finishing the job. What do you think about a federal court stepping into a DAO vote like this? Drop your take in the comments and share your view on social media using #KelpDAO, #Aave, and #Arbitrum to keep the conversation going.
