Aave Faces $6 Billion Deposit Exodus After Kelp Hack Exposes DeFi Lender's Vulnerability

Aave has experienced a significant exodus of $6.6 billion in deposits, but this was not due to a direct hack on the platform. The total value locked in the protocol 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 as liquidations occurred over the weekend. Depositors are fleeing because Aave is now carrying a debt it did not create. After attackers 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 trackers estimate 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, where users deposit cryptocurrency to earn interest and others borrow against collateral. Kelp is a liquid restaking protocol that takes already-staked ether on Ethereum and routes it through a separate yield-generating system called EigenLayer, issuing a receipt token called rsETH in exchange. This rsETH is what users trade and, importantly, 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, worth about $292 million, to an address they controlled. 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 by Saturday afternoon, the language had changed to exploring paths to offset the deficit. The reason for the damage is due to concentration, as Aave's loan book spans 22 chains, but Ethereum alone holds $14.24 billion of the $17.82 billion in outstanding borrows. WETH accounts for 39.49% of all loans on the protocol, meaning the attack targeted the exact collateral-to-WETH pair that dominates Aave's book. Aave's founder, Stani Kulechov, stated 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 disappeared on a bridge Aave does not control, resulting in depositors losing either way. Liquid restaking tokens were whitelisted across every major lending protocol because they carried yield and represented a growing share of Ethereum's locked value. Risk models priced them as if they would hold peg under normal conditions, but none of them accounted for a scenario where the collateral becomes worthless due to a bridge on an unrelated chain being exploited. Trader Altcoin Sherpa wrote on X, 'AAVE is the backbone of DeFi, with billions invested, and almost every new DeFi infrastructure on new chains is a fork of it. When AAVE has contagion risk, it reveals the fragility of the entire system.' The token price is now trying to determine whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders who back that reserve will absorb the loss.