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

Aave has experienced a massive exodus of $6.6 billion in deposits, but the reason lies not with Aave itself. 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 price dropped 16% to $92, and daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing Aave due to a vulnerability the protocol did not create. Attackers drained 116,500 rsETH from Kelp's bridge on Saturday and 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 nearing $236 million. Aave, the largest lending protocol in DeFi, allows users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already-staked ether on Ethereum and channels it through EigenLayer, a separate yield-generating system, issuing an rsETH receipt token in exchange. This rsETH is what users trade and, crucially, what some users posted as collateral on Aave to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth about $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 damage is due to Aave's loan book spanning 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, meaning the attack targeted the dominant collateral-to-WETH pair in Aave's book. Stani Kulechov, Aave's founder, confirmed 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 on a bridge Aave does not control, leaving depositors vulnerable to losses. 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 hold peg under normal conditions but 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 on X, 'AAVE is the backbone of DeFi, with billions invested, and pretty much every new DeFi infrastructure on new chains is a fork of it. When AAVE has contagion risk, it exposes the fragility of the entire system.' The current token price reflects concerns over whether Umbrella is sufficient to cover the resulting hole and whether stkAAVE holders backing the reserve will absorb the loss.