because the final allocation of losses between rsETH on Ethereum (which is technically "fully backed") and external chains is still tbd, i can only read this as a statement of Aave Labs' preference - they would rather rsETH on mainnet to have zero haircut, and for rsETH on L2s/external chains to bear the full loss (essentially zeroed out)

ultimately, the allocation of losses will be mostly decided by Kelpdao team (and lawyers)

but we can consider why this outcome would be aave labs' preference, and what would be the impact on users if this is how it ends up working out

aave labs preference

aave core market on ethereum is covered by umbrella insurance module, and is also explicitly covered by aave dao backstop (eg dao committed to using treasury to backstop against bad debt). so if rsETH on ethereum ends up with no haircut, then not only are umbrella users completely unaffected (other than potentially GHO stakers to cover unbacked GHO on external chains), but the aave treasury remains intact

aave core is also the primary money-maker for the aave protocol, and preserving this is probably top priority for labs team

user impacts

if rsETH on Ethereum has no socialized losses/haircut, users on Aave core would end up being mostly unimpacted

however, certain L2 networks would face an extremely heavy burden, with WETH suppliers taking a direct hit from unbacked rsETH

current rsETH collateral across external chains includes:

in some cases, rsETH backed loop positions may comprise a large share of the backing of aWETH, meaning that any assets borrowed against ETH may also be at risk of a haircut (USDC and USDT0 markets)

mantle, arbitrum, and base seem to have the highest risk here, with mantle in particular having the majority of aWETH backed by potentially zero value rsETH. it is possible that Aave could successfully maneuver these chains into bailing out their markets (this may be part of the reason why Aave Labs prefers no loss socialization on Ethereum, to force the issue with relatively better capitalized chain ecosystems)

we also note that ethena has a material deposit amount in the mantle USDT pool (debank.com/profile/0xB8734a14…) which may face a haircut, potentially exceeding their excess capital buffer. if this is the case, then this would become another vector of contagion risk into Aave markets including Core and Plasma (which has been relatively less affected as it had no rsETH exposure at the time of the hack)

comparison with full socialization

personally, i think that concentrating losses on external chains is actually a worse outcome for Aave

in the case where losses are spread evenly including Ethereum users, this would engage Umbrella ETH depositors (roughly $50 million) and also enable using rsETH collateral on Aave Core to repay part of the debt, likely reducing the uncovered loss on Ethereum mainnet to an amount lower than Aave's current treasury reserves

the loss levels on external chains would then be at much more manageable levels, with less risk of cascading spillover into large haircuts on stablecoin markets or impairment to other key aave collateral assets like USDe

awaiting further updates from the Kelpdao team to see how this will play out in practice