DeFi Lender Aave Faces $6 Billion Deposit Exodus Amid Kelp Hack

Aave has experienced a significant outflow of deposits, with its total value locked declining from $26.4 billion to approximately $20 billion, according to DefiLlama. The AAVE token's value dropped by 16% to $92, while daily fees surged to $1.99 million due to liquidations over the weekend. The exodus of deposits is attributed to Aave's exposure to a hacking incident on Kelp's bridge, which resulted in the theft of 116,500 rsETH tokens. These stolen tokens were then used as collateral on Aave V3 to borrow wrapped ether, leaving Aave to contend with a potential $196 million bad debt. The incident highlights the risks associated with DeFi lending protocols and the potential for contagion risk in the system. Aave, as the largest lending protocol in DeFi, is particularly vulnerable due to its significant loan book and concentration of loans on the Ethereum chain. The protocol's founder, Stani Kulechov, has stated that the exploit was external and did not compromise Aave's contracts, but the incident has raised concerns about the protocol's risk models and its ability to mitigate potential losses.