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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but rather a consequence of the Kelp bridge exploit. The protocol's total value locked (TVL) 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 frenzy of liquidations over the weekend. Depositors are fleeing Aave due to a liability the protocol did not create. Attackers drained 116,500 rsETH from Kelp's bridge on Saturday, using the stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain analytics estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler reaching approximately $236 million. As the largest lending protocol in DeFi, Aave enables users to deposit cryptocurrency to earn yields, while others borrow against collateral. Kelp, a liquid restaking protocol, redirects already-staked ether on Ethereum through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is traded by users and, crucially, used as collateral on Aave to borrow against. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, valued at around $292 million, to a controlled address. They then deposited the stolen rsETH onto Aave V3 as collateral, borrowing 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 the damage is attributed to Aave's loan book, which spans 22 chains, with Ethereum alone holding $14.24 billion of the $17.82 billion in outstanding borrows. WETH accounts for 39.49% of all loans on the protocol, making the attacked collateral-to-WETH pair a significant component of Aave's book. Stani Kulechov, Aave's founder, emphasized that the exploit was external and the protocol's contracts remained uncompromised. 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, ultimately affecting depositors. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and growing share of Ethereum's locked value. Risk models priced them under the assumption 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. Trader Altcoin Sherpa noted on X, 'AAVE is the backbone of DeFi, with billions invested, and nearly every new DeFi infrastructure on new chains is a fork of it. When AAVE faces contagion risk, it exposes the fragility of the entire system.' The current token price reflects the uncertainty surrounding whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing the reserve will absorb the loss.