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

Aave has experienced a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a security breach in the Kelp protocol. The total value locked in Aave dropped from $26.4 billion to nearly $20 billion, with the AAVE token price falling 16% to $92. Daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing due to Aave's involuntary absorption of a significant financial hole. Attackers drained 116,500 rsETH from Kelp's bridge, which was then used as collateral on Aave V3 to borrow wrapped ether. On-chain data indicates that Aave's borrow amount is approximately $196 million, with total positions across Aave, Compound, and Euler reaching $236 million. Aave, the largest DeFi lending protocol, allows users to deposit cryptocurrency to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, routes staked ether through a yield-generating system called EigenLayer, issuing a receipt token, rsETH. This rsETH is used by users for trading and as collateral for borrowing. 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 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 concentration of Aave's loan book, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows, and WETH comprising 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's acceptance of liquid restaking tokens as collateral, which lost their backing due to a bridge exploit on a chain Aave does not control, has put depositors at risk. The whitelisting of liquid restaking tokens across major lending protocols, due to their yield and growing share of Ethereum's locked value, did not account for a scenario where the collateral's value would drop to zero due to a bridge exploit. The risk models did not price in such a scenario, leaving Aave to quantify its bad debt exposure.