DeFi is trapped in 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 continues to ferment, involving an increasing number of well-known projects such as Aave, LayerZero, and Arbitrum, even reaching the level where some popular narratives are facing a death sentence.

Well-known KOL Feng Wu Xiang stated on the X platform that only ETH is safe now, and ARB has also authorized the freezing and transfer of customer assets. No L2 is truly a L2 anymore. L2 thrived on Arbitrum and also perished because of it.

Another well-known KOL, Blue Fox, expressed that the biggest loss from this Kelp incident is not Aave or Kelp, but LayerZero, which is simply too shortsighted to see the essence of the entire event. The essence of this event is not to disprove L2 (even if it's a fake L2), but to disprove cross-chain bridges.

More and more intense opinions are emerging in the public discourse, with the parties involved each holding their own views and shifting blame, making the Kelp DAO theft incident a typical window for observing the division of responsibility in security incidents and the conflict between pragmatism and technological fundamentalism.

1. Is L0 Disproven? Cross-Chain Bridges as the Biggest Loser

The key point of the incident is the detailed report on the hacking released by LayerZero yesterday, which preliminarily identifies the attacker as the Lazarus Group with North Korean ties. The attack was achieved by poisoning the downstream RPC infrastructure relied upon by its decentralized verification network (DVN), with the attacker controlling some RPC nodes and coordinating a DDoS attack to induce the system to switch to malicious nodes, thereby forging cross-chain transactions.

"Using the compromised nodes to poison the RPC infrastructure and combining it with DDoS attacks on unaffected RPCs to force failover is a very complex method. This is essentially an infrastructure war," commented Samuel Tse, Head of Investment and Partnerships at Animoca Brands.

At the end of the report, LayerZero stated that the protocol operated entirely 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 its intended goal, isolating the entire attack to a single application—zero contagion risk to the entire system, and other OFT or OApp were not affected.

This complete removal of responsibility became the fuse for a huge backlash in public opinion, with many well-known industry figures expressing dissatisfaction with LayerZero's performance in this incident.

"L0 completely absolved itself, the entire article shifted all the blame to KelpDAO's configuration error, claiming it had no issues at all. Incredible. May I ask, why is a 1/1 configuration allowed to exist? Why could the attacker access the internal RPC list? Why did the failover logic directly trust the contaminated RPC after the DDoS, without stopping verification or even doing something?" well-known industry researcher CM retorted.

"This deliberate avoidance makes me very uncomfortable. The statement clearly says 'the protocol operated entirely as expected.' The attack is described as RPC nodes being compromised and RPC poisoning. But RPC poisoning is not like that; their own infrastructure was invaded and damaged. Given that the statement does not explain how the invasion occurred, I will not rush to re-enable the bridge," said well-known DeFi developer banteg.

Kelp DAO also responded, stating that the single-validator (1/1) configuration that led to this attack was not a choice made in disregard of advice, but the default setting in LayerZero's official guidelines, and the validator network (DVN) exploited by the attacker is LayerZero's own infrastructure.

According to analysis from Dune, among the 2,665 OApp contracts based on LayerZero, 47% adopted the 1/1 DVN configuration, which is a single-validator mechanism, significantly amplifying the industry's risk.

More frightening than the problems that arose is the refusal of the parties involved to acknowledge mistakes and evade responsibility. As the number one player in cross-chain communication and Layer0 narratives, hundreds of crypto projects are using its cross-chain infrastructure to bridge tokens and assets across different chains. If it continues to maintain an arrogant posture, it will inevitably further affect the industry's confidence in it.

Public opinion generally believes that while LayerZero was not directly hacked, its reputation suffered the most—it must pay the price for "allowing weak configurations," or else the cross-chain narrative will collapse.

In other words, LayerZero not only needs to propose clear technical improvement measures but also needs to take on more responsibility in asset compensation plans.

2. Is Layer2 Dead? Arbitrum's Extraordinary Freeze

Discussions regarding Layer2 stem from Arbitrum's freezing actions. Today at noon, the Arbitrum Security Committee announced that it had taken emergency action to rescue 30,766 ETH stored in the Arbitrum One address by the hacker, currently valued at 71 million USD.

Arbitrum also stated that after extensive technical investigation and review, the Security Committee determined and executed a technical solution to transfer the funds to a secure location without affecting the state of any other chain 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.

According to industry interpretations, the Arbitrum Security Committee used a privileged state overlay transaction type (part of ArbOS but essentially never used) that allowed 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 completely bypassed the attacker's private key, and only the chain itself (through the sequencer / ArbOS upgrade path controlled by the Arbitrum Security Committee) could inject it.

It is reported that the Arbitrum Security Committee consists of 12 individuals elected by the Arbitrum DAO, and any decision requires the agreement of 9 out of 12 members.

A stone stirred up a thousand waves. Previously, it seemed that Arbitrum, as a representative Layer2, did not have the ability or authority to handle user ETH assets, as this contradicts the decentralized spirit of blockchain.

In past hacking incidents, the USDT and USDC stolen by hackers could often be frozen by Tether and Circle immediately to reduce user losses. ETH, as a native asset of the chain, has historically never been frozen and transferred by the chain itself, exceeding the expectations of most users.

Many viewpoints support Arbitrum's actions, such as "All companies, banks, and legitimate financial institutions will ultimately adopt a secondary architecture. Operating like a centralized entity in critical moments is not a flaw, but an advantage." However, for more technical geeks, it is not so.

"No need for private keys, no need for authorization, direct transfer." In many views, Arbitrum's operation this time can be said to redefine the degree of decentralization of Layer2, making them feel a lack of security on Layer2.

Blue Fox bluntly stated that this incident has directly touched the ideological red line of DeFi: "Not Your keys, not your coins." This incident has returned to the classic dilemma of crypto: pragmatic security vs. completely decentralized security.

Conclusion

When LayerZero says "the protocol operated entirely as expected," it preserved technical correctness but lost public opinion and trust; when Arbitrum transferred 71 million USD in ETH using privileged transactions, it saved user funds but severely damaged the decentralization narrative of Layer2.

The Kelp theft incident has simultaneously put two of the hottest narratives on trial: Is the cross-chain bridge infrastructure or a risk amplifier? Is Layer2 a reliable expansion of Ethereum or a secondary bank disguised in decentralization?

LayerZero was compromised due to a single-validator node mechanism, while Arbitrum used a centralized special voting mechanism to recover losses for LayerZero and Kelp DAO. This forms an extremely ironic closed loop: a protocol that prides itself on decentralization collapses due to its "single point of weakness"; ultimately, it has to rely on another protocol's "centralized privilege" to resolve the situation.

It forces the entire industry to confront a question that has never been answered directly: When the ideal of decentralization collides with the security costs of reality, which side are we willing to sacrifice?

The discussion of grand narratives is a focal point of public opinion, while user compensation plans are another realistic focal point. Even if Arbitrum recovers over 70 million USD through technical means, Aave still faces nearly 200 million USD in bad debts; how can users' interests be properly maintained and protected?

In the vast majority of hacking incidents, losses in the tens of millions of dollars are catastrophic for protocols, and users' claims for compensation often end in failure. However, this incident involves leading star projects such as Aave and LayerZero, making the handling of bad debts highly scrutinized.

Aave proposed two possible bad debt handling plans today: the first is to socialize the losses among all rsETH holders (shared across the entire chain), with Kelp DAO uniformly reducing the value of all rsETH (mainnet + L2) by approximately 15% decoupling; the second is to only let rsETH holders on L2 bear all losses, while the mainnet rsETH maintains its original value.

However, Kelp DAO and LayerZero officials have yet to discuss their roles in the compensation plan. From LayerZero's attempt to absolve itself of responsibility in the report, it is not difficult to see that the project believes that without responsibility, there is no obligation for compensation.

However, a protocol valued at billions of dollars, regarded as a foundational dependency by hundreds of projects, choosing "technical exemption" in the face of massive losses caused by DVN's default configuration is itself a huge irony to the definition of "underlying infrastructure."

This is a typical prisoner's dilemma, where all parties in crisis are trying to minimize their losses through "interest cuts" rather than repairing the industry's trust deficit by sharing responsibility.

From the negative impact of this incident on all parties in the industry, for the DeFi sector, this will be the most dangerous prisoner's dilemma in history.