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

Aave has witnessed a staggering $6.6 billion exodus of deposits, but the protocol itself was not breached. The total value locked in Aave dropped from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token price fell 16% to $92, while daily fees surged to $1.99 million due to a wave of liquidations over the weekend. Depositors are fleeing Aave because the protocol is now carrying a debt it did not create. When hackers drained 116,500 rsETH from Kelp's bridge on Saturday, they used the stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain data estimates that the Aave-specific borrow amounts to around $196 million, with total positions across Aave, Compound, and Euler totaling approximately $236 million. Aave is the largest lending protocol in DeFi, allowing users to deposit cryptocurrency to earn interest and others to borrow against collateral. Kelp, a liquid restaking protocol, takes already-staked ether on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. That 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, valued at approximately $292 million, to an address under their control. They then deposited the stolen rsETH onto Aave V3 as collateral and borrowed wrapped ether against it. A bridge is a blockchain-based tool that enables the transfer of tokens between networks that may not originally support them. Initially, Aave stated that the Umbrella reserve would cover any deficit, but by Saturday afternoon, the language had softened to exploring paths to offset the deficit. The concentration of loans on Ethereum explains why the damage is felt so intensely. Aave's loan book spans 22 chains, but Ethereum alone holds $14.24 billion of the $17.82 billion in outstanding borrows, with WETH accounting for 39.49% of all loans on the protocol. This means the attack targeted the exact collateral-to-WETH pair that dominates Aave's book. Stani Kulechov, Aave's founder, clarified that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and the backing of that token vanished on a bridge Aave does not control, leaving depositors vulnerable to loss. Liquid restaking tokens were whitelisted across every major lending protocol due to their yield and growing share of Ethereum's locked value. Risk models priced them as if they would maintain their peg under normal conditions, but none of them accounted for a scenario where the collateral becomes worthless because a bridge on an unrelated chain is exploited. According to trader Altcoin Sherpa, '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 has 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 who back that reserve will absorb the loss.