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

Aave has experienced a massive exodus of $6.6 billion in deposits, but it's not due to a direct hack on the platform. The total value locked in the protocol plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token saw a 16% decline to $92, while daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing because Aave is now carrying a significant liability that it did not create. When 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 Aave's borrow amount is around $196 million, with total positions across Aave, Compound, and Euler reaching approximately $236 million. Aave is the largest lending protocol in DeFi, where users deposit cryptocurrency to earn yields, and others borrow against collateral. Kelp is a liquid restaking protocol that takes already-staked ether on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. That rsETH is what users trade and, crucially, what some users posted on Aave as collateral to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $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 later softened its language to 'explore 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, explains why the damage is so significant. 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, said the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and that token's backing vanished on a bridge Aave does not control. The depositors are at risk of losing their funds 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. The risk models priced them as if they would hold their value under normal conditions. However, none of them accounted for a scenario where the collateral becomes worthless because a bridge on a chain Aave does not control gets exploited on a Saturday. As trader Altcoin Sherpa wrote on X, 'AAVE is the backbone of DeFi, has billions in it, and pretty much every single new DeFi infrastructure on new chains is a fork of it. When AAVE has contagion risk, it shows the fragility of the entire system.' The token price is now trying to determine whether Umbrella is large enough to cover the hole and whether stkAAVE holders who back that reserve will absorb the loss.