Decentralized lending giant Aave has effectively come to a standstill after its core markets reached 100% utilization, rendering users unable to withdraw billions of dollars in cryptocurrency. According to DeFi Warhold, this means that approximately $5 billion in stablecoins, including USDT and USDC, are now inaccessible due to a lack of liquidity. The crisis unfolded on April 18, following a $292 million exploit of the Kelp DAO rsETH bridge, where an attacker used forged cross-chain messages to mint unbacked rsETH, which was then used as collateral to borrow nearly $200 million in WETH on Aave. As news of the 'bad debt' spread, a classic bank-run scenario ensued, resulting in a total of $6.6 billion exiting the protocol within 24 hours.
When approached for comment, Aave founder Stani Kulechov stated that he had 'nothing useful to say' on the matter. DeFi Warhold explained that 100% utilization across all markets signifies a complete lack of liquidity, preventing withdrawals and liquidations from being processed, and effectively trapping $3 billion in USDT and $2 billion in USDC. The situation is further complicated by the fact that if prices fluctuate, the 'bad debt' will compound, with no mechanism in place to mitigate it.
This, according to DeFi Warhold, is the worst possible scenario for a lending protocol, as it leaves the platform vulnerable to further 'bad debt' with no means of self-protection. Natalie Newson, a senior blockchain security researcher at CertiK, echoed these concerns, stating that Aave is in serious trouble. '100% utilization doesn't just mean a lack of liquidity; it means the protocol's self-defense systems are down,' she said.
Newson emphasized that liquidations require liquidity to function, and without it, undercollateralized positions cannot be closed, leading to a continuous accumulation of 'bad debt' that the protocol cannot recover from without external assistance. Aave's risk framework had anticipated the possibility of 100% utilization, with former Aave Risk Manager Alex Bertomeu-Gilles warning in 2020 that at this level, 'no liquidity is left' and the situation becomes 'problematic' for depositors seeking to withdraw their funds. Technical analyst Duo Nine was the first to highlight that Aave had reached 100% utilization, noting that the crisis began when whales such as Justin Sun and MEXC exchange withdrew billions from AAVE following the rsETH exploit.
As a result, the ETH market hit 100% utilization, soon followed by the USDT and USDC pools, leaving these markets 'stuck with money locked'.