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

Aave has experienced a significant exodus of deposits, with $6.6 billion withdrawn, not due to a direct hack on the platform. The total value locked in the protocol dropped from $26.4 billion to nearly $20 billion, according to DefiLlama, with the AAVE token falling 16% to $92 and daily fees surging to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing because Aave has inherited a problem not of its making. When attackers drained 116,500 rsETH from Kelp's bridge, they used the stolen tokens as collateral on Aave V3 to borrow wrapped ether. On-chain data indicates that Aave's exposure is around $196 million, with total positions across Aave, Compound, and Euler totaling approximately $236 million. As the largest lending protocol in DeFi, Aave 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 channels it into a separate yield-generating system called EigenLayer, issuing an rsETH receipt token. This rsETH is traded by users and, crucially, used by some as collateral on Aave to borrow against. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, worth about $292 million, to a controlled address, which was then deposited onto Aave V3 as collateral to borrow wrapped ether. 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 damage is due to Aave's loan book, which spans 22 chains but has $14.24 billion of its $17.82 billion in outstanding borrows on Ethereum alone, with WETH accounting for 39.49% of all loans, making it the dominant collateral-to-WETH pair on the protocol. Aave's founder, Stani Kulechov, 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 due to an exploit on a bridge Aave does not control, leaving depositors at risk. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and growing share of Ethereum's locked value, with risk models pricing them as if they would hold peg under normal conditions. Yet, these models did not account for a scenario where the collateral becomes worthless due to a bridge exploit on an unrelated chain. The AAVE token price is now reflecting concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing that reserve will absorb the loss.