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

Aave has experienced a significant 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 suffered a 16% decline to $92, while daily fees surged to $1.99 million as liquidations swept through the weekend. Depositors are fleeing due to a hole in Aave's balance sheet that it did not create. Hackers drained 116,500 rsETH from Kelp's bridge on Saturday and used 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, the largest lending protocol in DeFi, allows users to deposit crypto to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes ether already staked on Ethereum and routes it through a separate yield-generating system called EigenLayer, issuing a receipt token, rsETH, in exchange. That rsETH is what users trade and, critically, what some users posted on Aave as collateral to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $292 million, to an address they controlled. They then deposited the stolen rsETH onto Aave V3 as collateral and borrowed wrapped ether against it. A bridge is a blockchain-based tool that facilitates token transfers between networks that may not originally support them. Initially, Aave stated that the Umbrella reserve would cover any deficit, but by Saturday afternoon, the language had softened to 'explore 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, explains why the damage is significant. 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, emphasized 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 major lending protocols due to their yield and growing share of Ethereum's locked value. Risk models priced them as if they would hold peg under normal conditions, but none accounted for a scenario where the collateral goes to zero because a bridge on a chain Aave does not control got exploited. As trader Altcoin Sherpa noted on X, 'AAVE is the backbone of DeFi, with billions invested, and pretty much every new DeFi infrastructure on new chains is a fork of it. When AAVE has contagion risk, it reveals the fragility of the entire system.' The current token price reflects the market's attempt to determine whether the Umbrella reserve is sufficient to cover the hole and whether stkAAVE holders who back that reserve will absorb the loss.