Aave just saw $6.6 billion go out the door, and it’s not because someone hacked Aave.
The protocol’s total value blocked increased from $26.4 billion on April 18 to nearly $20 billion as of Sunday morning in the United States, according to DefiLlama. The AAVE token fell 16% to $92 and daily fees soared to $1.99 million as liquidations unfolded throughout the weekend.
Depositors are fleeing because Aave carries a hole he did not create. When the attackers drained 116,500 rsETH from the Kelp Bridge on Saturday, they threw the stolen tokens on Aave V3 as collateral and borrowed wrapped ether against them.
On-chain trackers value Aave-specific borrowing at around $196 million, with total positions in Aave, Compound, and Euler at around $236 million.
Aave is DeFi’s largest lending protocol, where users deposit cryptocurrencies to earn yield and other users borrow against collateral. Kelp is a liquid takeover protocol, which takes ether already staked on Ethereum and routes it through a separate yield generation system called EigenLayer, issuing in exchange a receipt token called rsETH.
This rsETH is what users are trading and, more importantly, what some users have posted on Aave as collateral to borrow against.
On Saturday, attackers tricked the Kelp cross-chain bridge into releasing 116,500 rsETH, worth approximately $292 million, to an address they controlled. They then deposited the stolen rsETH on Aave V3 as collateral and borrowed wrapped ether against it.
A bridge is a blockchain-based socket that transfers tokens between different networks, where they may not be originally supported.
Aave initially said the Umbrella Reserve would cover any shortfall. Saturday afternoon, the language had softened to “explore ways to compensate for the deficit”. This is not how a protocol speaks when it knows how much it owes and has the money to pay it.
Focus explains why damage lands here. Aave’s lending portfolio spans 22 chains, but Ethereum alone holds $14.24 billion of the $17.82 billion in outstanding borrowing. WETH represents 39.49% of all loans on the protocol, meaning the attack hit exactly the collateralized-WETH pair that dominates Aave’s ledger.
Stani Kulechov, founder of Aave, said the exploit was external and that the protocol’s contracts were not compromised. But Aave accepted a liquid takeover token as collateral, and support for that token disappeared on a bridge that Aave does not control. Depositors lose in all cases.
Liquidity recovery tokens were whitelisted by all major lending protocols as they yielded yield and accounted for a growing share of Ethereum’s locked value.
Risk models assessed them as if they would remain docked under normal conditions. However, none of them evaluated a scenario in which the guarantee would drop to zero because a bridge on a chain that Aave does not touch was operated on a Saturday.
“AAVE is the backbone of DeFi, contains billions, and virtually every new DeFi infrastructure on new chains is a branch of it,” Altcoin trader Sherpa wrote on X. “When AAVE poses a risk of contagion, it shows the fragility of the entire system.”
The question the token price is now trying to answer is whether Umbrella is big enough to cover the hole and whether the stkAAVE holders who support this reserve are about to take the loss.
