Aave Faces $6 Billion Deposit Exodus After Kelp Hack Exposes DeFi Lending Risks

Aave witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a result of a breach in Kelp's bridge that led to the exploitation of rsETH as collateral to borrow wrapped ether, leaving Aave to grapple with the extent of its potential bad debt. The protocol's total value locked plummeted from $26.4 billion to nearly $20 billion, with the AAVE token experiencing a 16% decline to $92 and daily fees surging to $1.99 million amidst a flurry of liquidations over the weekend. Depositors are fleeing due to Aave's involuntary exposure to a hole not of its creation, stemming from the theft of 116,500 rsETH from Kelp's bridge, which was then used as collateral on Aave V3 to borrow wrapped ether, with on-chain trackers estimating the Aave-specific borrow to be around $196 million. As the largest lending protocol in DeFi, Aave enables users to deposit crypto for yield while others borrow against collateral, but the recent hack has underscored the risks associated with accepting liquid restaking tokens like rsETH as collateral, particularly when their backing can vanish due to exploits on bridges beyond Aave's control.