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

Aave has experienced a significant outflow of $6.6 billion, not due to a direct hack, but as a result of the Kelp bridge exploit. The protocol's total value locked plummeted from $26.4 billion to nearly $20 billion on Sunday, according to DefiLlama. The AAVE token's value dropped 16% to $92, with daily fees surging to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing Aave due to the protocol's exposure to a hole it did not create. Attackers drained 116,500 rsETH from Kelp's bridge and used 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 at approximately $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 already staked ether on Ethereum and routes it through EigenLayer, issuing a receipt token called rsETH. This rsETH is tradable and was used by some users as collateral on Aave to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $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 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, explains why the damage is significant. 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 vanished on a bridge Aave does not control, leaving depositors at risk. The risk models for liquid restaking tokens, which were whitelisted across major lending protocols due to their yield and growing share of Ethereum's locked value, did not account for a scenario where the collateral's value would drop to zero due to a bridge exploit on a chain Aave does not control. The token price is now reflecting the uncertainty surrounding whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders who back the reserve will absorb the loss.