Ave depositors drop by $15B following Kelp DAO exploit
Ave, the largest decentralized lending protocol, saw nearly $15 billion in deposits withdraw after the Kelp Dao exploit on Saturday.
According to Avescan data, the total value offered for Aave fell to $30.8 billion on Saturday from $45.8 billion.
The decline occurred following an attack that leaked 116,500 restocked ether (rsETH), worth $293 million, from the rETH bridge operated by Kelp DAO LayerZero. The exploiter then used a portion of the stolen money to loan Ave.
Aave's incident report states that 89,567 rETH have been placed on the protocol and that this shortfall could range from $123 million to $230 million depending on how it is ultimately allocated.
According to institutional digital asset trading platform Talos, the outflows reflect fears of contagion from bad debt and broader capital flight from decentralized finance (DeFi).
Bad debt created by the kelp exploit has left the Aave v3 Wrapped Ether (WETH) market 100% leveraged for the time being, and no liquidity has been diverted for quick exits, Talos said in a report on Tuesday.
SparkLend's total value locked (TVL) rose by $1.3 billion after the Kelp Dao exploit, indicating that the fourth largest lending protocol is taking some of the money out of Aave, blockchain analyst EmberCN said in a post on X Wednesday.
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Kelp mining is distributed through DeFi loans.
The show highlights how DeFi interoperability is a double-edged sword as Kelp's DAO exploits spill over into credit markets and lead to a “broad liquidity crisis,” Tanay Ved, senior research associate at Talos, told Cointelegraph.
By wrapping up the risks involved in re-leasing, bridging and lending assets, she said, allowing the effect to spread beyond initial exploitation, she said the phenomenon calls for a stronger underwriting framework and a more holistic approach to security to address systemic exposure to yielding assets.
Aave said on Tuesday that it had unfrozen WETH stock on the Ethereum Core V3 market, which allowed users to submit WETH to the V3 lending protocol, but WETH remained frozen on Ethereum Prime, Arbitrum, Base, Mantle and Linea.
Related: Kelp DAO Attacker Moves $175M in Ether After Exploit: Arkham
Traders Kelp DAO does not socialize losses.
On Monday, Aave's risk manager outlined two possible scenarios for resolving the bad debt. The first scenario involves spreading the loss across all rETH token holders on the Ethereum mainnet and Layer-2s, leaving about $123 million in bad debt on Eve.
The option would shift the deficit entirely to Layer-2 networks, resulting in roughly $230 million in bad debt on Ave.
Traders have taken to predicting the market to bet on the outcome, with 20% of traders betting on Kelp Dao to link losses to rsETH holders on the mainnet rather than L2 holders bearing the shortfall, Polymarket data shows.
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