Decentralized lending platform Aave has effectively come to a standstill after all its core markets reached 100% utilization, rendering users unable to withdraw billions of dollars' worth of cryptocurrency. According to DeFi Warhold, this means that approximately $5 billion in stablecoins, including USDT and USDC, are now inaccessible due to the protocol's lack of liquidity.
The crisis unfolded on April 18, following a $292 million exploit of the Kelp DAO rsETH bridge, which led to a 'bad debt' of nearly $200 million in WETH. As the news spread, a massive $6.6 billion was withdrawn from the protocol within 24 hours, precipitating a bank-run scenario.
Aave founder Stani Kulechov declined to comment, stating he had 'nothing useful to say.' DeFi Warhold explained that 100% utilization signifies a complete lack of liquidity, making it impossible to process liquidations and leaving $3 billion in USDT and $2 billion in USDC 'stuck with no clean exit.' Furthermore, the analyst warned that price fluctuations could exacerbate the bad debt, with no mechanism in place to mitigate it. Natalie Newson, a senior blockchain security researcher at CertiK, concurred that Aave is in a dire situation, emphasizing that 100% utilization not only indicates a lack of liquidity but also compromises the protocol's self-defense systems. Newson noted that liquidations require liquidity to function, and without it, undercollateralized positions cannot be closed, leading to a snowball effect of bad debt that may be irrecoverable without external assistance.
The KelpDAO exploit, which did not directly target Aave, has exposed the interconnected risks within the DeFi ecosystem, putting the entire system to the test. Aave's risk framework had anticipated the possibility of 100% utilization, with former Risk Manager Alex Bertomeu-Gilles warning in 2020 that such a scenario would be 'problematic' due to the depletion of liquidity.
Technical analyst Duo Nine was the first to highlight Aave's 100% utilization, attributing the crisis to the rsETH exploit and the subsequent withdrawal of billions by major players like Justin Sun and MEXC exchange.