Aave Faces $6 Billion Deposit Exodus Following Kelp Hack, Exposing DeFi Lender's Structural Vulnerabilities

Aave witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a result of a devastating exploit. The protocol's total value locked 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 flurry of liquidations over the weekend. Depositors are fleeing due to Aave's unintended burden. Attackers drained 116,500 rsETH from Kelp's bridge on Saturday, which was then used as collateral on Aave V3 to borrow wrapped ether. On-chain trackers estimate the Aave-specific borrow to be around $196 million, with total positions across Aave, Compound, and Euler reaching $236 million. Aave, the largest DeFi lending protocol, allows users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, routes staked ether through EigenLayer, issuing rsETH in exchange. This rsETH is traded and used as collateral on Aave. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, valued at $292 million, to a controlled address. They then deposited the stolen rsETH onto Aave V3 as collateral, borrowing wrapped ether against it. Aave initially stated 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, with Ethereum holding $14.24 billion of the $17.82 billion in outstanding borrows. WETH accounts for 39.49% of all loans on the protocol, making the attack particularly impactful. Aave's founder, Stani Kulechov, emphasized the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, which lost its backing due to a bridge exploit outside of Aave's control. Depositors are at risk of losing either way. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and representation of Ethereum's locked value. Risk models priced them as if they would maintain their peg under normal conditions, but none accounted for a scenario where the collateral becomes worthless due to a bridge exploit. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the deficit and whether stkAAVE holders will bear the loss.