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

Aave witnessed a massive exodus of $6.6 billion in deposits, not due to a direct hack on the platform. The total value locked in the protocol plummeted from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token experienced a 16% decline to $92, while daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing because Aave is shouldering a liability it did not create. When attackers siphoned off 116,500 rsETH from Kelp's bridge on Saturday, they utilized the stolen tokens 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 totaling approximately $236 million. Aave is the largest lending protocol in DeFi, where users deposit cryptocurrency to earn yield, while others borrow against collateral. Kelp is a liquid restaking protocol that takes already-staked ether on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. That rsETH is what users trade and, crucially, what some users posted as collateral on Aave to borrow against. On Saturday, attackers deceived Kelp's cross-chain bridge into releasing 116,500 rsETH, worth about $292 million, to an address they controlled. They then deposited the stolen rsETH onto Aave V3 as collateral and borrowed wrapped ether against it. Aave initially stated that the Umbrella reserve would cover any deficit, but by Saturday afternoon, the language had shifted to "exploring paths to offset the deficit." The concentration of the damage is due to Aave's loan book spanning 22 chains, with Ethereum alone holding $14.24 billion of the $17.82 billion in outstanding borrows. WETH accounts for 39.49% of all loans on the protocol, meaning the attack targeted the exact collateral-to-WETH pair that dominates Aave's book. Stani Kulechov, Aave's founder, acknowledged that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and that token's backing vanished on a bridge Aave does not control, leaving depositors vulnerable to losses. Liquid restaking tokens were whitelisted across every major lending protocol because they carried yield and represented a growing share of Ethereum's locked value. Risk models priced them as if they would hold peg under normal conditions, but none of them accounted for a scenario where the collateral becomes worthless due to a bridge exploit on a chain Aave does not control. The token price is now attempting to determine whether Umbrella is sufficient to cover the hole and whether stkAAVE holders who back that reserve will absorb the loss.