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

Aave witnessed a staggering $6.6 billion withdrawal, not due to a direct hack, but as a result of a cascading effect from the Kelp bridge exploit. 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 and daily fees surging to $1.99 million amidst widespread liquidations over the weekend. Depositors are fleeing due to Aave's involuntary exposure to a hole created by the Kelp attack, where 116,500 rsETH, valued at approximately $292 million, were drained and used as collateral to borrow wrapped ether on Aave V3. The Aave-specific borrow amounts to roughly $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 for yield generation, while others borrow against collateral. The exploited Kelp protocol, a liquid restaking platform, issues rsETH tokens, which some users posted as collateral on Aave. The attackers manipulated Kelp's cross-chain bridge, releasing 116,500 rsETH to their control, which was then deposited onto Aave V3 as collateral to borrow wrapped ether. Initially, Aave stated the Umbrella reserve would cover any deficit, but later shifted to exploring paths to offset the loss. The concentration of Aave's loan book, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows, and WETH comprising 39.49% of all loans, exacerbated the damage. Aave's founder, Stani Kulechov, confirmed the exploit was external and the protocol's contracts were not compromised. However, Aave's acceptance of liquid restaking tokens as collateral, which vanished due to a bridge exploit on an unrelated chain, puts depositors at risk. The incident highlights the fragility of the DeFi system, with the AAVE token price reflecting concerns over whether the Umbrella reserve can cover the resulting hole and the potential impact on stkAAVE holders.