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

Aave has experienced a significant exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a security breach in Kelp's bridge. The total value locked in the protocol plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token price dropped 16% to $92, while daily fees surged to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing Aave because the protocol is now carrying a debt it did not create. Attackers had drained 116,500 rsETH from Kelp's bridge on Saturday and used the stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler at 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 already-staked ether on Ethereum and routes it through EigenLayer, issuing a receipt token called rsETH. This rsETH is tradable and was used by some users 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 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. The damage is concentrated due to Aave's loan book being heavily dominated by Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows. WETH accounts for 39.49% of all loans on the protocol, making it the exact collateral-to-WETH pair that was affected by the attack. Aave's founder, Stani Kulechov, confirmed that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and the token's backing vanished due to a bridge exploit outside of Aave's control. Depositors are at risk of losing their funds either way. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and representation 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 would become worthless due to a bridge exploit on an unrelated chain. The token price is now reflecting the uncertainty surrounding whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders who back the reserve will absorb the loss.