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

Aave witnessed a staggering $6.6 billion exodus, not due to a direct hack, but rather a consequence of a vulnerability exposed by the Kelp hack. The protocol's total value locked plummeted from $26.4 billion to nearly $20 billion, with the AAVE token experiencing a 16% decline to $92. Daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing due to Aave's unforeseen burden, stemming from attackers draining 116,500 rsETH from Kelp's bridge and utilizing the stolen tokens as collateral to borrow wrapped ether on Aave V3. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler nearing $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, issues a receipt token, rsETH, which users can trade and post as collateral on Aave. However, when attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth approximately $292 million, they deposited the stolen tokens onto Aave V3 as collateral and borrowed wrapped ether against them. 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, exacerbated the damage. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. Nevertheless, Aave's acceptance of a liquid restaking token as collateral, which lost its backing due to a bridge exploit, has left depositors vulnerable to losses. The incident highlights the fragility of the DeFi system, with trader Altcoin Sherpa noting that Aave's contagion risk underscores the vulnerability of the entire ecosystem. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will bear the loss.