Decentralized lending giant Aave has effectively come to a standstill after its core markets reached 100% utilization, leaving users unable to access billions of dollars in cryptocurrency. According to DeFi Warhold, this means that approximately $5 billion in stablecoins, including USDT and USDC, are now locked, with the protocol lacking the necessary liquidity to facilitate withdrawals. The crisis unfolded on April 18, following a $292 million exploit of the Kelp DAO rsETH bridge, which led to a 'bad debt' of nearly $200 million in WETH. As the news spread, a massive $6.6 billion was withdrawn from the protocol within 24 hours, triggering a bank-run-like scenario.
When approached for comment, Aave founder Stani Kulechov replied, 'I do not have anything useful to say.' DeFi Warhold emphasized that 100% utilization across all markets signifies a complete lack of liquidity, rendering liquidations impossible and leaving $3 billion in USDT and $2 billion in USDC 'stuck with no clean exit.' The situation is further complicated by the potential for compounding bad debt if prices fluctuate, with no mechanism in place to mitigate it. Aave's predicament has been described as the worst possible scenario for a lending protocol, as it is unable to protect itself against additional bad debt when liquidations cannot be executed. Natalie Newson, a senior blockchain security researcher at CertiK, warned that Aave is in serious trouble, stating that '100% utilization doesn't just mean a lack of liquidity; it means the protocol's self-defense systems are down.' Newson highlighted that liquidations require liquidity to function, and without it, undercollateralized positions cannot be closed, leading to a buildup of bad debt that the protocol may not be able to recover from without external assistance.
The researcher noted that Aave's issues were triggered by the KelpDAO exploit, which did not directly hack Aave but rather caused a ripple effect that put the entire DeFi system to the test. The interconnectivity that makes DeFi powerful also increases the risk of a single point of failure escalating into a large-scale disaster, Newson added. Aave's risk framework had anticipated the possibility of 100% utilization, with former Aave Risk Manager Alex Bertomeu-Gilles warning in 2020 that at this level, 'no liquidity is left' and the situation becomes 'problematic' for depositors seeking to withdraw their funds.
Technical analyst Duo Nine was the first to point out that Aave had reached 100% utilization, explaining that the crisis began when whales like Justin Sun and MEXC exchange withdrew billions from AAVE following the rsETH exploit, causing the ETH market to hit 100% utilization and eventually spreading to USDT and USDC pools.