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

Aave has experienced a significant exodus of deposits, with $6.6 billion withdrawn, not due to a direct hack on the platform. The total value locked in the protocol decreased 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, while daily fees surged to $1.99 million as liquidations occurred over the weekend. Depositors are fleeing due to Aave's unforeseen liability. After 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 at approximately $236 million. Aave, the largest DeFi lending protocol, allows users to deposit cryptocurrency to earn yields, while others 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 tradable and was used by some users as collateral on Aave. On Saturday, attackers exploited Kelp's cross-chain bridge, releasing 116,500 rsETH, valued at 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 concentration of loans 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, explain why the damage is significant. Aave's founder, Stani Kulechov, emphasized 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, putting depositors at risk. The pricing of risk models for liquid restaking tokens did not account for a scenario where the collateral becomes worthless due to a bridge exploit on an unrelated chain. As trader Altcoin Sherpa noted, Aave's contagion risk exposes the fragility of the entire DeFi system, and the token price will reflect whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will bear the loss.