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, not due to a direct hack, but rather as a result of a security breach in the Kelp protocol. The total value locked in Aave dropped from $26.4 billion to nearly $20 billion, with the AAVE token price falling 16% to $92 and daily fees surging to $1.99 million due to widespread liquidations over the weekend. Depositors are fleeing because Aave is now carrying a significant debt burden that it did not create. When attackers drained 116,500 rsETH from Kelp's bridge, they used the stolen tokens as collateral on Aave V3 to borrow wrapped ether, resulting in approximately $196 million in Aave-specific borrowings and $236 million across Aave, Compound, and Euler. Aave, as the largest lending protocol in DeFi, allows users to deposit cryptocurrency to earn yield, while others borrow against collateral. The Kelp protocol, a liquid restaking platform, issues a receipt token called rsETH, which users can trade and use as collateral. However, when attackers exploited Kelp's cross-chain bridge, releasing 116,500 rsETH worth around $292 million, they deposited the stolen tokens onto Aave V3 as collateral and borrowed wrapped ether against them. 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 weighted towards Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows, and WETH accounting for 39.49% of all loans on the protocol. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. Nevertheless, Aave accepted a liquid restaking token as collateral, and the token's backing vanished due to an exploit on a bridge that Aave does not control, leaving depositors vulnerable to losses. The risk models had priced these tokens as if they would maintain their peg under normal conditions, but did not account for a scenario where the collateral's value drops to zero due to a bridge exploit on an unrelated chain. The incident highlights the fragility of the DeFi system, with trader Altcoin Sherpa noting that Aave's contagion risk poses a significant threat to the entire ecosystem. The current token price reflects the market's uncertainty about whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will absorb the loss.