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

Aave has experienced a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a structural risk exposure. The protocol's total value locked plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token saw a 16% decline to $92, while daily fees surged to $1.99 million amidst widespread liquidations over the weekend. Depositors are fleeing Aave because it has been left carrying a hole it did not create, stemming from an attack on Kelp's bridge that drained 116,500 rsETH, which was then used 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. Aave, the largest lending protocol in DeFi, allows users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already-staked ether on Ethereum and routes it through EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is what users trade and post as collateral on Aave to borrow against. On Saturday, attackers exploited Kelp's cross-chain bridge, 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 on Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows, and the dominance of WETH, which accounts for 39.49% of all loans, explains why the damage is significant. Aave's founder, Stani Kulechov, confirmed 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 on a bridge Aave does not control, leaving depositors at risk. The risk models for these tokens did not account for a scenario where the collateral would become worthless due to a bridge exploit on an unrelated chain. As trader Altcoin Sherpa noted, AAVE is the backbone of DeFi, and its contagion risk exposes the fragility of the entire system. The current token price reflects concerns over whether Umbrella is sufficient to cover the resulting hole and whether stkAAVE holders will absorb the loss.