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

Aave has witnessed a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a clever exploit of Kelp's bridge. 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 widespread liquidations over the weekend. Depositors are fleeing Aave due to a hole created by an external exploit. Attackers drained 116,500 rsETH from Kelp's bridge on Saturday, which they then used 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 totaling $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 routes it through EigenLayer, issuing a receipt token called rsETH. This rsETH is tradable and, crucially, was used by some users as collateral on Aave to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $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 damage is concentrated due to Aave's loan book being heavily skewed towards Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows being on Ethereum alone. WETH accounts for 39.49% of all loans on the protocol, making the attack particularly impactful. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. However, Aave's acceptance of liquid restaking tokens as collateral has created a vulnerability, as the backing of these tokens can vanish on a bridge outside of Aave's control. Depositors are ultimately at risk of losing their funds. Liquid restaking tokens were widely whitelisted across major lending protocols due to their yield and growing share of Ethereum's locked value. Risk models priced these tokens assuming they would hold 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 the market's attempt to quantify whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will bear the loss.