Aave just saw $6.6 billion walk out the door, and it’s not because someone hacked Aave.
The total value of the protocol fell from $26.4 billion on April 18 to almost $20 billion in the US morning hours on Sunday, DefiLlama said. The $AAVE token fell 16% to $92, and daily costs rose to $1.99 million as liquidations broke through the weekend.
Savers flee because Aave carries a gap that she did not create. When attackers extracted 116,500 rsETH from Kelp’s bridge on Saturday, they dumped the stolen tokens as collateral on Aave V3 and lent wrapped ether against it.
On-chain trackers estimate the Aave-specific loan at around $196 million, with total holdings at Aave, Compound, and Euler around $236 million.
Aave is the largest lending protocol in DeFi, where users deposit crypto to earn returns and other users borrow against collateral. Kelp is a liquid replenishment protocol where ether already staked on Ethereum is passed through a separate yield-generating system called EigenLayer, issuing a receiving token called rsETH in return.
That rsETH is what users trade and, crucially, what some users put up on Aave as collateral to borrow against.
On Saturday, attackers tricked Kelp’s cross-chain bridge into releasing 116,500 rsETH, worth about $292 million, to an address they controlled. They then deposited that stolen rSETH on Aave V3 as collateral and borrowed wrapped ether against it.
A bridge is a blockchain-based solution that transfers tokens between different networks, where they may not be supported originally.
Aave initially said the Umbrella Reserve would cover any shortfall. By Saturday afternoon, the language had softened to “explore ways to compensate for the shortfall.” That’s not how a protocol talks when it knows how much it owes and has the money to pay it.
The concentration explains why the damage ends up here. Aave’s loan portfolio spans 22 chains, but Ethereum alone holds $14.24 billion of the $17.82 billion in outstanding loans. WETH represents 39.49% of all loans on the protocol, meaning the attack hit exactly the collateral-to-WETH pair that dominates Aave’s book.
Stani Kulechov, the founder of Aave, said the exploit was external and that the protocol’s contracts had not been compromised. But Aave accepted a liquid redraw token as collateral, and that token’s backing disappeared on a bridge that Aave has no control over. The savers lose anyway.
Liquid Retaking tokens were whitelisted by every major lending protocol because they generated returns and represented a growing portion of Ethereum’s locked value.
They priced the risk models as if they would hold up under normal circumstances. However, none of them have estimated a scenario in which the collateral goes to zero because a bridge on a chain that Aave does not touch was exploited on Saturday.
“$AAVE is the backbone of DeFi, there are billions in it, and virtually every new DeFi infrastructure on new chains is a fork of it,” wrote trader Altcoin Sherpa on $AAVE has a risk of contamination, it shows the vulnerability of the entire system.”
What the token price is now trying to answer is whether Umbrella is big enough to close the gap, and whether stkAAVE holders backing that reserve are about to eat the loss.