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

Aave has experienced a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a breach in the Kelp protocol. The total value locked in Aave dropped from $26.4 billion to approximately $20 billion, 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 become embroiled in a crisis not of its own making. Attackers drained 116,500 rsETH from Kelp's bridge, which was then used as collateral on Aave V3 to borrow wrapped ether, resulting in Aave being left to grapple with the extent of its bad debt. On-chain data indicates that the Aave-specific borrow amounts to roughly $196 million, with total positions across Aave, Compound, and Euler totaling around $236 million. Aave, as the largest lending protocol in DeFi, allows users to deposit cryptocurrency to earn yields, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already staked ether on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is tradable and, crucially, was used by some users as collateral on Aave to borrow against. On Saturday, attackers exploited Kelp's cross-chain bridge, releasing 116,500 rsETH, valued at about $292 million, to a controlled address. They then deposited this 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 reason for the concentration of damage lies in Aave's loan book, which spans 22 chains, with Ethereum alone holding $14.24 billion of the $17.82 billion in outstanding borrows. WETH constitutes 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, 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 backing of this token vanished due to an exploit on a bridge Aave does not control, leaving depositors at risk of loss. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and representation of a growing share of Ethereum's locked value. Risk models priced them under the assumption they would hold peg under normal conditions but did not account for a scenario where the collateral's value drops to zero due to a bridge exploit on an unrelated chain. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing this reserve will absorb the loss.