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

Aave has witnessed a staggering $6.6 billion exodus, not due to a direct hack, but as a result of a security breach in the Kelp protocol. The total value locked in Aave 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 wave of liquidations over the weekend. Depositors are fleeing Aave due to a vulnerability it did not create. Attackers 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. As the largest lending protocol in DeFi, Aave allows users to deposit cryptocurrency to earn yield, while others borrow against collateral. Kelp, a liquid restaking protocol, takes already-staked ether on Ethereum and routes it through EigenLayer, issuing a receipt token called rsETH. This rsETH is traded by users and, crucially, used as collateral on Aave to borrow against. On Saturday, attackers tricked Kelp's cross-chain bridge into releasing 116,500 rsETH, worth around $292 million, to a controlled address. 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 later softened its stance to exploring paths to offset the deficit. The concentration of damage on Aave is attributed to its loan book, which spans 22 chains but has a significant portion of its outstanding borrows, $14.24 billion of $17.82 billion, on Ethereum alone. WETH accounts for 39.49% of all loans on the protocol, making it the dominant collateral-to-WETH pair. Aave's founder, Stani Kulechov, confirmed that the exploit was external and the protocol's contracts were not compromised. However, Aave's acceptance of a liquid restaking token as collateral, which had its backing vanish on a bridge Aave does not control, puts depositors at risk. Liquid restaking tokens were whitelisted across major lending protocols due to their yield and representation 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 becomes worthless due to a bridge exploit on an unrelated chain. The token price now reflects concerns over whether the Umbrella reserve is sufficient to cover the resulting hole and whether stkAAVE holders backing that reserve will bear the loss.