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

Aave has experienced a significant exodus of $6.6 billion in deposits, but the cause lies not with a direct hack on 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. This sharp decline was accompanied by a 16% drop in the AAVE token to $92 and a spike in daily fees to $1.99 million, as liquidations swept through the weekend. Depositors are fleeing due to a hole in Aave's balance sheet that it did not create. Attackers drained 116,500 rsETH from Kelp's bridge on Saturday and then used these stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain trackers estimate that the Aave-specific borrow amounts to roughly $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 routes it through EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is tradable and was used by some users as collateral on Aave to borrow against. On Saturday, attackers exploited Kelp's cross-chain bridge, releasing 116,500 rsETH, worth about $292 million, to a controlled address. They then deposited this stolen rsETH onto Aave V3 as collateral and borrowed wrapped ether against it. A bridge is a blockchain tool that enables token transfers between networks that may not originally support them. Initially, Aave stated that the Umbrella reserve would cover any deficit, but by Saturday afternoon, the stance had shifted to exploring paths to offset the deficit. The damage is concentrated due to Aave's loan book, which spans 22 chains but has $14.24 billion of the $17.82 billion in outstanding borrows on Ethereum alone, with WETH making up 39.49% of all loans on the protocol. The attack specifically targeted the collateral-to-WETH pair that dominates Aave's book. Stani Kulechov, Aave's founder, emphasized that the exploit was external and did not compromise the protocol's contracts. However, Aave accepted a liquid restaking token as collateral, and the backing of this token vanished due to an exploit on a bridge Aave does not control, leaving depositors at risk. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and representation of a growing share of Ethereum's locked value. Risk models priced them as if they would hold peg under normal conditions, but none accounted for a scenario where the collateral goes to zero because a bridge on an unrelated chain was exploited. As 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 highlights the fragility of the entire system.' The current token price reflects concerns over whether the Umbrella reserve is sufficient to cover the deficit and whether stkAAVE holders, who back this reserve, will absorb the loss.