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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a consequence of the Kelp bridge 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 wave of liquidations over the weekend. Depositors are fleeing Aave due to a hole created by an external exploit. 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, as the largest DeFi lending protocol, allows users to deposit crypto for yield and borrow against collateral. Kelp, a liquid restaking protocol, operates by taking already-staked ether on Ethereum and routing it through EigenLayer, issuing an rsETH receipt token. This rsETH is traded and used as collateral on Aave. On Saturday, attackers exploited Kelp's cross-chain bridge, releasing 116,500 rsETH, worth approximately $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 on Ethereum, with $14.24 billion of the $17.82 billion in outstanding borrows, and WETH comprising 39.49% of all loans, makes it particularly vulnerable to this type of attack. Stani Kulechov, Aave's founder, 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 vanished due to a bridge exploit on a separate chain, puts depositors at risk. The risk models for these tokens did not account for a scenario where the collateral's value drops to zero due to a bridge exploit. The AAVE token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders will bear the loss.