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 blaming each other, 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 Become the Biggest Losers

The key point of the incident is the detailed report on the hacking attack released by LayerZero yesterday, which preliminarily identifies the attacker as the Lazarus Group with North Korean ties. The attack was carried out 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, combined with launching 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 Cooperation at Animoca Brands.

At the end of the report, LayerZero stated that the protocol operated completely 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 has become the trigger 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 the blame entirely to KelpDAO's configuration error, claiming it had no issues at all. Incredible. May I ask, why was a 1/1 configuration allowed to exist? Why could the internal RPC list be accessed by the attacker? 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 completely as expected.' The attack is described as RPC nodes being compromised and RPC poisoning. But RPC poisoning is not the case; their own infrastructure was invaded and destroyed. Given that the statement does not explain how the invasion occurred, I will not rush to re-enable the bridge," stated 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 rather 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 themselves is the refusal of the parties involved to admit mistakes and avoid accountability. As the number one player in cross-chain communication and Layer0 narrative, LayerZero is used by hundreds of crypto projects 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 although LayerZero was not directly hacked, its reputation suffered the most—it must pay the price for "allowing weak configurations," otherwise the cross-chain narrative will collapse.

In other words, LayerZero not only needs to propose clear technical improvement measures but also needs to take 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 at the Arbitrum One address by the hacker, currently valued at $71 million.

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

This action has stirred up a significant wave. Previously, Arbitrum was seen as a representative Layer2 that 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 opinions support Arbitrum's actions, such as "All companies, banks, and legitimate financial institutions will ultimately adopt secondary architectures. Operating like a centralized entity at critical moments is not a flaw, but an advantage." However, for more technical geeks, this is not the case.

"No need for private keys, no authorization, direct transfer." In many views, Arbitrum's operation this time can be said to redefine the level of decentralization of Layer2, making them feel insecure 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 completely as expected," it preserved technical correctness but lost public opinion and trust; when Arbitrum transferred $71 million ETH using privileged transactions, it saved user funds but severely damaged the decentralization narrative of Layer2.

The Kelp theft incident has 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 its 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 conclude.

It forces the entire industry to face a question that has never been directly answered: When the ideal of decentralization collides with the real cost of security, 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 through technical means, Aave still faces nearly $200 million in bad debts; how will users' interests be properly maintained and protected?

In most hacking incidents, losses in the tens of millions of dollars are catastrophic for protocols, and users' claims for compensation often end in vain. However, this incident involves leading star projects such as Aave and LayerZero, and their bad debt handling plans are under close scrutiny.

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

However, Kelp DAO and LayerZero officials have not yet discussed 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, seen as a foundational dependency by hundreds of projects, choosing "technical exemption" in the face of huge 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 own losses through "cutting interests," rather than repairing the trust deficit in the industry by sharing responsibilities.

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