A $292 million hack linked to recovery protocol Kelp DAO has reverberated through decentralized finance (DeFi) lending and market trust far beyond the initial incident, with Aave becoming one of the hardest-hit examples.
Over the weekend, Aave’s native token (AAVE) fell by around 26%, while the protocol also saw a sharp drop in total value locked (TVL) and continued outflows that intensified the downturn.
Kelp DAO Hack Triggers Aave Crisis
The chain of events began when the attacker drained approximately 116,500 rsETH, worth approximately $292 million, from Kelp DAO’s LayerZero bridge. The stolen staking tokens were then used as collateral on Aave V3, allowing the attacker to borrow approximately $236 million in WETH.
Since rsETH subsequently became unsecured, the collateral behind these positions is not liquidable, leaving the borrowed funds stuck in the lending system. As a result, Aave now faces a $280 million bad debt that it cannot collect directly.
The impact on users and depositors was rapid. With Aave’s ETH pool reaching 100% utilization, the protocol has almost no ETH available for withdrawals. In practical terms, this means that users looking to withdraw quickly may already face liquidity limits at the pool level.
As crypto portfolio manager Pratik Kala said, the fear was not about losses that Aave itself had created, but about the protocol having a gap it did not create, prompting withdrawals driven by uncertainty. Kala likened this behavior to a bank run, summarizing the dynamic as: “back off first, ask questions later.”
Since Saturday, when news of the heist broke, Aave has seen about $9 billion in net outflows. The total value locked on the platform fell by more than a third, falling to around $17.5 billion.
The damage is not limited to Aave. Data from DefiLlama indicates that across all decentralized lending protocols, TVL fell by approximately $13 billion in 48 hours.
Price 86% below all-time highs
As markets digested the fallout, Aave’s token performance also reflected the increased stress. On Monday, AAVE was down about 26% from last Friday’s one-month high of $118, following the broader crypto rally early last week.
At the time of writing, AAVE was trading around $88 per token. Data from CoinGecko further highlights the precariousness of the asset: the cryptocurrency is said to be around 86% below its all-time high of $661.
Aave responded to the situation by taking steps to contain further risks. The protocol has frozen rsETH markets on its platform. On Sunday, Aave said its own analysis indicates that rsETH traded on Ethereum remains fully supported; however, it maintained restrictions as a precaution.
Featured image from OpenArt, chart from TradingView.com
