Decentralized lending giant Aave has effectively come to a standstill after its core markets reached 100% utilization, rendering users unable to withdraw billions of dollars in cryptocurrency. According to DeFi Warhold, this means that approximately $5 billion in stablecoins, including USDT and USDC, are now inaccessible due to a lack of liquidity. The crisis unfolded on April 18, following a $292 million exploit of the Kelp DAO rsETH bridge, which led to a bank-run scenario, resulting in $6.6 billion exiting the protocol within 24 hours.
Aave founder Stani Kulechov stated that he has no useful comments to make on the situation. DeFi Warhold explained that 100% utilization signifies a complete lack of liquidity, preventing liquidations from being processed and leaving $3 billion in USDT and $2 billion in USDC without a clear exit strategy. Furthermore, if market prices fluctuate, the bad debt will compound, with no mechanism in place to address it. This scenario is the worst possible situation for a lending protocol, as it leaves the platform vulnerable to further bad debt with no means of self-protection.
Natalie Newson, a senior blockchain security researcher at CertiK, emphasized that Aave is in severe trouble, as 100% utilization not only indicates a lack of liquidity but also means that the protocol's self-defense systems are ineffective. Newson stressed that liquidations require liquidity to function, and without it, undercollateralized positions cannot be closed, leading to a perpetual accumulation of bad debt.
She also noted that Aave's situation is a result of the fallout from the KelpDAO exploit, which has put the entire DeFi system to the test. The interconnectivity that makes DeFi powerful can also turn a single point of failure into a large-scale disaster, affecting even those who have done nothing wrong. Aave's risk framework had anticipated the possibility of 100% utilization, with former Risk Manager Alex Bertomeu-Gilles warning in 2020 that at this level, no liquidity would be left, and the situation would become problematic for depositors.
Technical analyst Duo Nine was the first to highlight that Aave had reached 100% utilization, stating that the rsETH exploit had led to bad debt, prompting whales like Justin Sun and MEXC exchange to withdraw billions from Aave, initially causing the ETH market to hit 100% utilization and later spreading to USDT and USDC pools.