Until April 17, lending stablecoins on Aave yielded 2.32% APY, lower than the Federal Reserve's overnight rate of 3.64%. This discrepancy implied that the market viewed an unregulated smart contract as a lower credit risk than the US Treasury.
However, this mispricing was corrected within 48 hours. The catalyst was an exploit on Kelp DAO's cross-chain bridge, which allowed an attacker to mint unbacked tokens and borrow against them on Aave. The resulting contagion led to $6-10 billion in outflows from Aave, causing utilization on certain pools to reach 100% and depositors to be unable to withdraw their funds.
In response, Aave's stablecoin deposit APYs surged from 3-6% to 13.4% within two days. The incident highlights the unique risks associated with DeFi, including the lack of bankruptcy laws and recourse for users. This has significant implications for institutional allocators assessing DeFi exposure, as the market's previous mispricing of risk has been corrected.