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

Aave has witnessed a massive exodus of $6.6 billion in deposits, not due to a direct hack, but as a result of a structural risk exposed by the Kelp hack. 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 flurry of liquidations over the weekend. Depositors are fleeing because Aave is now carrying a significant debt it did not create. When attackers drained 116,500 rsETH from Kelp's bridge, they 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 at 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 already-staked ether on Ethereum and routes it through a yield-generating system called EigenLayer, issuing a receipt token, rsETH. Users trade and post rsETH as collateral to borrow against it. On Saturday, attackers tricked Kelp's cross-chain bridge into 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 the dominance of WETH, which accounts for 39.49% of all loans, explain why the damage is significant. Aave's founder, Stani Kulechov, stated 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 vanished due to an exploit 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, but risk models did not account for a scenario where the collateral's value drops to zero due to a bridge exploit. The incident highlights the fragility of the DeFi system, with trader Altcoin Sherpa noting that Aave's contagion risk exposes the vulnerabilities of the entire system. The current token price reflects concerns over whether the Umbrella reserve is sufficient to cover the debt and whether stkAAVE holders will absorb the loss.