DeFi Lender Aave Faces $6 Billion Deposit Exodus Following Kelp Hack

Aave has experienced a massive exodus of $6.6 billion in deposits, not due to a direct hack on the platform. The total value locked in the protocol dropped from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token saw a 16% decline to $92, and daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing because Aave is now carrying a liability it did not create. When attackers drained 116,500 rsETH from Kelp's bridge on Saturday, they 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 totaling approximately $236 million. Aave, the largest lending protocol in DeFi, allows users to deposit cryptocurrency to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already staked ether on Ethereum and routes it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. Users trade and post this rsETH as collateral to borrow against on platforms like Aave. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth about $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 concentration of the damage is due to Aave's loan book spanning 22 chains, with Ethereum alone holding $14.24 billion of the $17.82 billion in outstanding borrows. WETH accounts for 39.49% of all loans on the protocol, meaning 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 the 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 did not account for a scenario where the collateral becomes worthless due to a bridge exploit on an unrelated chain. The AAVE token price is now reflecting the uncertainty surrounding whether the Umbrella reserve is sufficient to cover the deficit and whether stkAAVE holders, who back the reserve, will absorb the loss.