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

Aave has experienced a massive exodus of $6.6 billion in deposits, but this is not a direct result of a hack on the platform itself. The total value locked in the protocol 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 as liquidations swept through the weekend. Depositors are fleeing due to Aave being left with a hole it did not create, stemming from the drainage of 116,500 rsETH from Kelp's bridge by attackers on Saturday. The stolen tokens were 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 approximately $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 ether already staked on Ethereum and routes it through EigenLayer, issuing a receipt token called rsETH. This rsETH is traded by users and, crucially, posted 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 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 spanning 22 chains, with Ethereum alone holding $14.24 billion of the $17.82 billion in outstanding borrows. WETH constitutes 39.49% of all loans on the protocol, meaning the attack directly impacted the dominant collateral-to-WETH pair in Aave's book. Aave's founder, Stani Kulechov, emphasized that 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 at risk of loss. 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 as if they would maintain their 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. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders backing the reserve will absorb the loss.