Aave Faces $6 Billion Deposit Exodus After Kelp Hack Exposes DeFi Lender's Vulnerabilities

Aave has witnessed a staggering $6.6 billion withdrawal, and it's not due to a direct hack on the platform. The protocol's total value locked has plummeted from $26.4 billion on April 18 to approximately $20 billion as of Sunday morning, according to DefiLlama. The AAVE token has fallen 16% to $92, with daily fees surging to $1.99 million as liquidations swept through the weekend. Depositors are fleeing because Aave is shouldering a burden it didn't create. When attackers drained 116,500 rsETH from Kelp's bridge on Saturday, they dumped the stolen tokens on Aave V3 as collateral and borrowed wrapped ether against them. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler totaling approximately $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 ether that has already been staked on Ethereum and routes it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. That rsETH is what users trade and post as collateral on Aave to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $292 million, to an address they controlled. They then deposited the stolen rsETH onto Aave V3 as collateral and borrowed wrapped ether against it. A bridge is a blockchain-based tool that enables token transfers between networks that may not originally support them. Initially, Aave stated that the Umbrella reserve would cover any deficit, but by Saturday afternoon, the language had changed to 'exploring paths to offset the deficit.' The concentration of loans on Ethereum explains why the damage is significant. Aave's loan book spans 22 chains, but Ethereum alone holds $14.24 billion of the $17.82 billion in outstanding borrows, with WETH making up 39.49% of all loans on the protocol. The attack targeted the exact collateral-to-WETH pair that dominates Aave's book. Stani Kulechov, Aave's founder, stated that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and that token's backing vanished on a bridge Aave does not control, leaving depositors vulnerable to losses. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and growing share of Ethereum's locked value. Risk models priced them as if they would hold peg under normal conditions, but none accounted for a scenario where the collateral goes to zero because a bridge on a chain Aave does not control got exploited. 'AAVE is the backbone of DeFi, with billions invested, and nearly every new DeFi infrastructure on new chains is a fork of it,' trader Altcoin Sherpa wrote on X. 'When AAVE has contagion risk, it exposes the fragility of the entire system.' The token price is now trying to determine whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders who back that reserve will bear the loss.