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

Aave has witnessed a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a vulnerability exposed by the Kelp hack. The protocol's total value locked plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token suffered a 16% decline to $92, while daily fees surged to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing because Aave is now carrying a significant liability it did not create. When attackers drained 116,500 rsETH from Kelp's bridge on Saturday, they utilized 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 nearing $236 million. As the largest lending protocol in DeFi, Aave enables users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes ether already staked on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is traded by users and, crucially, posted as collateral on Aave to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, valued at approximately $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 by Saturday afternoon, the language had shifted to exploring paths to offset the deficit. The concentration of loans on Ethereum, which holds $14.24 billion of the $17.82 billion in outstanding borrows, explains why the damage is significant. WETH accounts for 39.49% of all loans on the protocol, meaning the attack targeted the dominant collateral-to-WETH pair in Aave's loan book. 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 an exploit on a bridge Aave does not 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 maintain their peg under normal conditions, but none accounted for a scenario where the collateral becomes worthless due to a bridge exploit on an unrelated chain. The token price is now reflecting concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing that reserve will absorb the loss.