Aave Faces $6 Billion Deposit Exodus Following Kelp Hack, Exposing DeFi Lender's Structural Vulnerabilities

Aave has experienced a significant exodus of $6.6 billion in deposits, not due to a direct hack, but rather as a consequence of a breach in Kelp's bridge. The total value locked in the protocol 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 surged to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing Aave due to the protocol's unintended exposure to a hole created by the Kelp hack, where attackers siphoned off 116,500 rsETH and utilized them 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 facilitates user deposits to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, routes already staked ether on Ethereum through a yield-generating system called EigenLayer, issuing a receipt token, rsETH, which users can trade and post as collateral. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, worth approximately $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, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows, and WETH accounting for 39.49% of all loans, explains why the damage is significant. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. However, Aave's acceptance of a liquid restaking token as collateral, which lost its backing due to a bridge exploit, has put depositors at risk. The risk models had priced these tokens as if they would maintain their peg under normal conditions, but none accounted for a scenario where the collateral's value drops to zero due to a bridge exploit on an unrelated chain. The token price is now reflecting the uncertainty surrounding whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders will bear the loss.