Aave Faces $6 Billion Deposit Exodus Following Kelp Hack, Exposing DeFi Lender's Structural Vulnerabilities

Aave has witnessed a staggering $6.6 billion withdrawal, not due to a direct hack, but as a result of a structural risk exposure. The protocol's total value locked plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token suffered a 16% decline to $92, while daily fees surged to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing Aave due to a hole it did not create, stemming from the exploitation of Kelp's bridge, which allowed attackers to drain 116,500 rsETH and use them as collateral to borrow wrapped ether on Aave V3. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler totaling $236 million. Aave, the largest lending protocol in DeFi, allows users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already staked ether on Ethereum and routes it through EigenLayer, issuing a receipt token, rsETH, which users trade and post as collateral on Aave. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth approximately $292 million, to a controlled address, which was then deposited onto Aave V3 as collateral to borrow wrapped ether. Aave initially stated that the Umbrella reserve would cover any deficit but later softened its stance to exploring paths to offset the deficit. The concentration of Aave's loan book, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows, and WETH accounting for 39.49% of all loans, explains why the damage is significant. Stani Kulechov, Aave's founder, acknowledged that the exploit was external and the protocol's contracts were not compromised, but Aave's acceptance of a liquid restaking token as collateral has backfired, as the token's backing vanished due to a bridge exploit outside Aave's control. The risk models had priced these tokens as if they would hold peg under normal conditions, but none accounted for a scenario where the collateral would become worthless due to a bridge exploit on an unrelated chain. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders backing the reserve will absorb the loss.