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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a result of a cascading effect from the Kelp hack. The protocol's total value locked 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 amidst a wave of liquidations over the weekend. Depositors are fleeing because Aave is now carrying a liability it did not create. When attackers siphoned off 116,500 rsETH from Kelp's bridge on Saturday, they proceeded to dump the stolen tokens on Aave V3 as collateral, borrowing wrapped ether against them. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler nearing $236 million. Aave, the largest lending protocol in DeFi, allows users to deposit cryptocurrency to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes ether already staked on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is what users trade and, crucially, what some users posted on Aave as collateral to borrow against. On Saturday, attackers duped Kelp's cross-chain bridge into releasing 116,500 rsETH, worth approximately $292 million, to an address under their control. They then deposited the stolen rsETH onto Aave V3 as collateral, borrowing wrapped ether against it. A bridge is a blockchain-based tool designed to transfer 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 tone had shifted to exploring paths to offset the deficit. The concentration of damage is attributed to Aave's loan book, which spans 22 chains, with Ethereum alone holding $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. Stani Kulechov, Aave's founder, 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 vulnerable to losses. 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 accounted for a scenario where the collateral would plummet to zero because a bridge on an unrelated chain was exploited. As trader Altcoin Sherpa noted on X, '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 faces contagion risk, it exposes the fragility of the entire system.' The current token price is attempting to answer whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders who back that reserve will absorb the loss.