Decentralized lending platform Aave has effectively halted operations after all its core markets simultaneously reached 100% utilization, rendering users unable to withdraw billions of dollars in cryptocurrency. DeFi expert DeFi Warhold explained that this means the protocol has exhausted its available funds, leaving users without access to their assets. Approximately $5 billion in stablecoins, including USDT and USDC, are currently locked due to the lack of liquidity. The crisis began on April 18, following a $292 million exploit of the Kelp DAO rsETH bridge, which triggered a bank-run scenario as $6.6 billion exited the protocol within 24 hours.
Aave founder Stani Kulechov stated that he had no useful comments on the situation. According to DeFi Warhold, the 100% utilization across all markets signifies a complete lack of liquidity, preventing withdrawals and liquidations from being processed, and resulting in $3 billion in USDT and $2 billion in USDC being stuck without a clear exit strategy. Furthermore, the analyst warned that if prices fluctuate, the bad debt will compound, and the protocol will be unable to protect itself.
Natalie Newson, a senior blockchain security researcher at CertiK, emphasized that Aave is in severe trouble, as the 100% utilization not only indicates a lack of liquidity but also means the protocol's defense mechanisms are down. Liquidations require liquidity to function, and without it, undercollateralized positions cannot be closed, leading to a situation where the protocol may not be able to recover without external assistance. Newson highlighted that the interconnectivity of DeFi, which makes it powerful, also increases the risk of a single point of failure becoming a large-scale disaster. Aave's risk framework had anticipated the possibility of 100% utilization, with former Aave Risk Manager Alex Bertomeu-Gilles warning in 2020 that at this level, no liquidity would be left, and the situation would become problematic for depositors.
The crisis has left those who did not engage in any wrongdoing dealing with the risks, and experts warn that the situation is a test for the entire DeFi system.