Aave Faces $6 Billion Deposit Exodus After Kelp Hack Exposes DeFi Lender's Vulnerabilities

Aave has experienced a significant exodus of $6.6 billion in deposits, but the cause is not a direct hack on the platform. The total value locked in the protocol dropped from $26.4 billion on April 18 to approximately $20 billion by Sunday morning, according to DefiLlama. The AAVE token price fell by 16% to $92, while daily fees surged to $1.99 million amidst a wave of liquidations over the weekend. Depositors are fleeing because Aave has been left carrying a liability it did not create. After attackers drained 116,500 rsETH from Kelp's bridge on Saturday, the stolen tokens were 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 totaling approximately $236 million. Aave is the largest lending protocol in DeFi, allowing users to deposit cryptocurrency to earn yield while others borrow against collateral. Kelp, a liquid restaking protocol, takes ether already staked on Ethereum and channels it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. This rsETH is traded by users and, crucially, used by some 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 a controlled address. The stolen rsETH was then deposited onto Aave V3 as collateral to borrow wrapped ether against it. 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 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 dominating Aave's book. Aave's founder, Stani Kulechov, emphasized that the exploit was external and the protocol's contracts were not compromised. However, Aave accepted a liquid restaking token as collateral, and the token's backing disappeared due to an exploit on a bridge Aave does not control, leaving depositors at risk of loss. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and growing share 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 would become worthless due to a bridge exploit on an unrelated chain. The token price now reflects concerns about whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing that reserve will absorb the loss.