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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a consequence of a security breach in Kelp's bridge. The total value locked in Aave plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token suffered a 16% decline to $92, while daily fees skyrocketed to $1.99 million amidst a flurry of liquidations over the weekend. Depositors are fleeing Aave due to a vulnerability it did not create. After attackers siphoned off 116,500 rsETH from Kelp's bridge, they utilized 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 totaling approximately $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, redirects already staked ether on Ethereum through a yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is tradable and, crucially, used by some users as collateral on Aave to borrow against. On Saturday, attackers deceived 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, which spans 22 chains but has $14.24 billion of its $17.82 billion in outstanding borrows on Ethereum, explains why the damage is significant. WETH accounts for 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 token's backing vanished due to a bridge exploit outside of Aave's control. Depositors are at risk of losing either way. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and representation of Ethereum's locked value. Risk models priced them under the assumption that they would hold peg under normal conditions, but none accounted for a scenario where the collateral becomes worthless due to a bridge exploit on an unrelated chain. The token price now hinges on whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders backing the reserve will absorb the loss.