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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a result of a breach in Kelp's bridge, which allowed attackers to drain 116,500 rsETH and utilize them as collateral on Aave V3 to borrow wrapped ether. The total value locked in Aave dropped from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama, with the AAVE token experiencing a 16% decline to $92 and daily fees surging to $1.99 million amidst widespread liquidations. The primary driver behind this deposit flight is Aave's unintentional accumulation of bad debt. Following the Kelp bridge hack, the stolen rsETH was used as collateral on Aave, resulting in roughly $196 million in Aave-specific borrowings and an aggregate of $236 million across Aave, Compound, and Euler. As the largest DeFi lending protocol, Aave enables users to deposit cryptocurrency to generate yield, while others borrow against collateral. Kelp, a liquid restaking protocol, redirects already-staked ether on Ethereum through EigenLayer, issuing an rsETH receipt token that users can trade and post as collateral on Aave. On Saturday, attackers exploited Kelp's cross-chain bridge, siphoning off 116,500 rsETH (approximately $292 million) to a controlled address, which was then deposited onto Aave V3 as collateral to borrow wrapped ether. Aave initially stated that the Umbrella reserve would cover any resulting deficit but later revised its stance to 'exploring paths to offset the deficit.' The concentration of Aave's loan book, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows and WETH accounting for 39.49% of all loans, explains why the damage is primarily contained within Aave. According to Stani Kulechov, Aave's founder, the exploit was external and the protocol's contracts were not compromised. However, Aave's acceptance of liquid restaking tokens as collateral, whose backing vanished due to a bridge exploit on an unrelated chain, has put depositors at risk. Liquid restaking tokens were whitelisted across major lending protocols due to their yield-generating capabilities and growing share of Ethereum's locked value. Risk models priced these tokens under the assumption that they would maintain their peg under normal conditions, but none accounted for a scenario where the collateral's value drops to zero due to a bridge exploit on an unrelated chain. The current token price is attempting to gauge whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders, who back this reserve, will absorb the loss.