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

Aave has experienced a massive exodus of $6.6 billion in deposits, but the protocol itself was not breached. The total value locked in Aave 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, with daily fees surging to $1.99 million as liquidations swept through the weekend. Depositors are fleeing due to a hole in Aave's balance sheet that it did not create. Attackers exploited Kelp's bridge on Saturday, draining 116,500 rsETH and using them 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 reaching $236 million. Aave is the largest lending protocol in DeFi, allowing users to deposit crypto to earn yields and others to borrow against collateral. Kelp, a liquid restaking protocol, takes already staked ether on Ethereum and routes it through EigenLayer, issuing an rsETH receipt token. This rsETH is traded and used as collateral on 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 Aave's loan book on Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows, and the dominance of WETH loans, explains why the damage is significant. Aave's founder, Stani Kulechov, confirmed that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted liquid restaking tokens as collateral, and the backing of these tokens vanished due to a bridge exploit outside 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 their peg under normal conditions but did not account for a scenario where the collateral becomes worthless due to a bridge exploit. The token price is now reflecting whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders backing the reserve will absorb the loss.