Decentralized lending platform Aave has effectively halted operations after its primary lending protocols exhausted all available funds, rendering users unable to withdraw billions of dollars in cryptocurrency. According to DeFi Warhold, the 100% utilization of Aave's markets signifies a complete depletion of liquidity, thereby preventing the protocol from processing withdrawals or liquidations.
Approximately $5 billion in stablecoins, including USDT and USDC, are currently locked within the protocol, which lacks the necessary liquidity to facilitate payouts. The crisis commenced on April 18 following a $292 million exploit of the Kelp DAO rsETH bridge, where an attacker utilized forged cross-chain messages to mint unbacked rsETH, subsequently depositing it into Aave as collateral to borrow nearly $200 million in WETH.
As news of the 'bad debt' spread, a bank-run scenario unfolded, culminating in the exit of $6.6 billion from the protocol within a 24-hour period. When approached for comment, Aave founder Stani Kulechov stated, 'I do not have anything useful to say.' DeFi Warhol explained that reaching 100% utilization across all markets simultaneously is equivalent to a complete halt, resulting in no available liquidity for withdrawals and inability to process liquidations, thereby leaving $3 billion in USDT and $2 billion in USDC 'stuck with no clean exit.' Furthermore, the analyst warned that if market prices fluctuate, the compounded bad debt will have no mechanism for coverage, placing the protocol in the worst possible situation.
Natalie Newson, a senior blockchain security researcher at CertiK, concurred that Aave is in serious trouble, emphasizing that 100% utilization not only signifies a lack of liquidity but also indicates that the protocol's self-defense systems are inactive. Newson cautioned that the interconnectivity that empowers DeFi also amplifies the risk of a single point of failure, transforming it into a large-scale disaster. Aave's risk framework had anticipated the scenario of 100% utilization, with former Aave Risk Manager Alex Bertomeu-Gilles noting in 2020 that at this level, 'no liquidity is left' and the situation becomes 'problematic' as depositors are unable to withdraw their funds. Technical analyst Duo Nine was the first to highlight Aave's 100% utilization, explaining that the rsETH exploit led to AAVE incurring bad debt, prompting whales like Justin Sun and MEXC exchange to withdraw billions from AAVE, initially causing the ETH market to reach 100% utilization and later spreading to USDT and USDC pools as over $6 billion in assets exited the protocol within hours.