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

Aave has witnessed a staggering $6.6 billion withdrawal, not due to a direct hack, but as a consequence of a vulnerability exposed by the Kelp hack. 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 because Aave is shouldering a burden it did not create. Attackers exploited Kelp's bridge, siphoning off 116,500 rsETH, which they then used as collateral on Aave V3 to borrow wrapped ether. On-chain data suggests 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 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 channels it through EigenLayer, issuing an rsETH receipt token. This rsETH is tradable and, crucially, was used by some users as collateral on Aave to borrow against. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, valued at about $292 million, to a controlled address. They then deposited the stolen rsETH onto Aave V3 as collateral to borrow wrapped ether. Aave initially stated that the Umbrella reserve would cover any deficit but later softened its stance to exploring paths to offset the deficit. The damage is concentrated due to Aave's loan book, which spans 22 chains but has $14.24 billion of the $17.82 billion in outstanding borrows on Ethereum alone, with WETH accounting for 39.49% of all loans. Stani Kulechov, Aave's founder, emphasized that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and its backing vanished due to an exploit on a bridge Aave does not control, leaving depositors vulnerable to loss. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and growing share of Ethereum's locked value, but risk models did not account for a scenario where the collateral's value drops to zero due to a bridge exploit. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing the reserve will absorb the loss.