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

Aave has witnessed a staggering $6.6 billion withdrawal, not due to a direct hack, but as a result of a ripple effect from the Kelp hack. The protocol's total value locked plummeted from $26.4 billion to nearly $20 billion, with the AAVE token experiencing a 16% decline to $92. Daily fees surged to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing due to Aave's unforeseen exposure to bad debt, stemming from attackers draining 116,500 rsETH from Kelp's bridge and utilizing the stolen tokens as collateral to borrow wrapped ether on Aave V3. 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 crypto to earn yield, while others borrow against collateral. The Kelp protocol, a liquid restaking platform, issues rsETH tokens, which some users posted as collateral on Aave. However, when attackers exploited Kelp's cross-chain bridge, releasing 116,500 rsETH worth approximately $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 concentration of Aave's loan book on Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows, and the dominance of WETH, which accounts for 39.49% of all loans, exacerbated the damage. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. Nevertheless, Aave's acceptance of liquid restaking tokens as collateral has left depositors vulnerable. The risk models had priced these tokens as if they would maintain their peg under normal conditions, but none accounted for a scenario where the collateral's value would drop to zero due to a bridge exploit on an unrelated chain. As trader Altcoin Sherpa noted, Aave's contagion risk highlights the fragility of the entire DeFi system, leaving the token price to reflect whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders will absorb the loss.