Aave recently saw $6.6 billion go out the door, and it’s not because someone hacked Aave.
According to DeFillama, the protocol’s total locked value dropped from $26.4 billion on April 18 to about $20 billion in the US morning hours on Sunday. The AAVE token fell 16% to $92, and daily fees rose to $1.99 million due to an increase in liquidations over the weekend.
Depositors are fleeing because Aave has a hole it didn’t create. When attackers withdrew 116,500 ETH from Kelp’s bridge on Saturday, they dumped the stolen tokens as collateral on Aave V3 and borrowed the ether wrapped in exchange for them.
On-chain trackers put Aave-specific borrowings at around $196 million, with total positions across Aave, Compound and Euler at around $236 million.
Aave is the largest lending protocol in DeFi, where users deposit crypto to earn yield and other users borrow against the collateral. Kelp is a liquid staking protocol that takes the Ether already staked on Ethereum and routes it through a separate yield-generating system called EigenLayer, issuing a receipt token called RSETH in return.
That RSETH is what users trade and, critically, what some users have posted on Aave as collateral to borrow.
On Saturday, attackers tricked Kelp’s cross-chain bridge into issuing 116,500 rsETH, worth approximately $292 million, to an address they controlled. They then deposited that stolen rsETH as collateral on Aave V3 and borrowed the wrapped ether against it.
Bridges are a blockchain-based tech that transfers tokens between different networks, where they may not be natively supported.
Aave previously said the umbrella reserve would cover any losses. By Saturday afternoon the language had softened to “exploring ways to offset the losses.” Protocol doesn’t talk like this when it knows how much it owes and has the money to pay it.
Concentration explains why the loss occurs here. Aave’s loan book spans 22 chains, but Ethereum alone has $14.24 billion of the $17.82 billion in outstanding lending. WETH accounts for 39.49% of all loans on the protocol, meaning the attack occurred on the exact collateral-to-WETH pair that dominates Aave’s ledger.
Aave founder Stanny Kulechov said the exploit was external and did not compromise the protocol’s contracts. But Aave accepted a liquid reset token as collateral, and the support for that token disappeared on a bridge that Aave doesn’t control. Depositors suffer losses either way.
Liquid restaking tokens were whitelisted in every major lending protocol because they bring yield and represent a growing portion of Ethereum’s locked value.
Risk models priced them as if they would hold the peg under normal circumstances. However, none of them priced in a scenario where collateral goes to zero because Aave does not touch a bridge on the chain that was exploited on Saturday.
“AAVE is the backbone of DeFi, there are billions of dollars in it, and every single new DeFi infrastructure on new chains is a fork of it,” trader Altcoin Sherpa wrote on X.
The token price is now trying to answer whether the umbrella is big enough to cover the hole, and whether stkAAVE holders who have returned that reserve are going to suffer losses.