Aave Sees $6 Billion Plunge in TVL as Kelp Hack Reveals DeFi Lender's Vulnerability

Aave has suffered a massive exodus of $6.6 billion in total value locked, but it wasn't due to a direct breach of the protocol. According to DefiLlama, the TVL dropped from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, with the AAVE token price plummeting 16% to $92 and daily fees surging to $1.99 million amidst a flurry of liquidations over the weekend. Depositors are fleeing because Aave has inherited a problem not of its making. When attackers siphoned off 116,500 rsETH from Kelp's bridge on Saturday, they used the stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain analytics estimate that the Aave-specific borrow amounts to around $196 million, with total positions across Aave, Compound, and Euler totaling approximately $236 million. As the largest lending protocol in DeFi, Aave allows users to deposit cryptocurrency to earn yields, while others borrow against collateral. Kelp, a liquid restaking protocol, takes ether already staked on Ethereum and channels it into a separate yield-generating system called EigenLayer, issuing a receipt token known as rsETH. This rsETH is tradable and, crucially, was used by some users as collateral on Aave to borrow against. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $292 million, to a controlled address. They then deposited the stolen rsETH onto Aave V3 as collateral and borrowed wrapped ether against it. Aave initially stated that the Umbrella reserve would cover any deficit but later softened its stance to 'exploring paths to offset the deficit,' suggesting uncertainty about the extent of its obligations. The concentration of Aave's loan book, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows and WETH constituting 39.49% of all loans, explains why the damage is so significant. Stani Kulechov, Aave's founder, emphasized that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and the backing of that token vanished due to an exploit on a bridge Aave does not control, leaving depositors vulnerable to losses. The whitelisting of liquid restaking tokens across major lending protocols was based on their yield and growing share of Ethereum's locked value, with risk models assuming they would maintain their peg under normal conditions. Nonetheless, these models did not account for a scenario where the collateral's value drops to zero due to a bridge exploit on an unrelated chain. As trader Altcoin Sherpa noted on X, 'AAVE is the backbone of DeFi, with billions invested, and nearly every new DeFi infrastructure on new chains is a fork of it. When AAVE faces contagion risk, it exposes the fragility of the entire system.' The current token price reflects the market's attempt to determine whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders, who back this reserve, will absorb the loss.