Aave Faces $6 Billion Deposit Loss as Kelp Hack Exposes DeFi Lender's Structural Vulnerability

Aave has experienced a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a consequence of a security breach in the Kelp protocol. The total value locked in Aave dropped from $26.4 billion to nearly $20 billion, with the AAVE token price falling 16% to $92. The daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing due to Aave's involuntary exposure to a hole created by the Kelp hack, where attackers drained 116,500 rsETH and used them as collateral to borrow wrapped ether on Aave V3. The on-chain tracking estimates the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler totaling $236 million. Aave, as the largest lending protocol in DeFi, allows users to deposit crypto to earn yield, while others borrow against collateral. The Kelp protocol, a liquid restaking protocol, issues rsETH tokens, which some users posted as collateral on Aave. The attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth approximately $292 million, and deposited the stolen tokens onto Aave V3 as collateral to borrow wrapped ether. Initially, Aave 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 on Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows, and the dominance of WETH, which accounts for 39.49% of all loans, exacerbated the damage. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. However, Aave's acceptance of liquid restaking tokens as collateral has led to a situation where the token's backing vanished due to a bridge exploit on a chain Aave does not control, ultimately affecting depositors. The risk models had priced these tokens as if they would hold peg under normal conditions, but failed to account for a scenario where the collateral's value drops to zero due to a bridge exploit. The current token price reflects the market's attempt to gauge whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will absorb the loss.