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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a result of a cascading effect triggered by 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 due to Aave's involuntary exposure to a risk it did not create. Attackers drained 116,500 rsETH from Kelp's bridge and utilized the stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler totaling approximately $236 million. As the largest lending protocol in DeFi, Aave enables users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already-staked ether on Ethereum and channels it through EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is tradable and was used by some users as collateral on Aave to borrow against. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, valued at about $292 million, to a controlled address. 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 stance to exploring paths to offset the deficit. The concentration of Aave's loan book, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows, and WETH accounting for 39.49% of all loans, explains why the damage is significant. Aave's founder, Stani Kulechov, confirmed 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 due to a bridge exploit beyond Aave's control, leaving depositors vulnerable to losses. 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 would become worthless due to a bridge exploit on an unrelated chain. The incident highlights the fragility of the DeFi system, with the AAVE token price now reflecting concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will absorb the loss.