A $292 million hack linked to restaking protocol Kelp DAO has sent shockwaves through decentralized finance (DeFi), damaging lending activity and market confidence well beyond the initial attack. Aave has emerged as one of the most severely affected platforms.
Over the weekend, Aave’s native token (AAVE) dropped roughly 26%, while the protocol also experienced a sharp fall in its total value locked (TVL) and sustained outflows that worsened the decline.
The crisis began when an attacker drained about 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 to borrow around $236 million in WETH. Because the rsETH later became effectively unbacked, the collateral supporting those loans cannot be liquidated, leaving the borrowed funds trapped within the lending system. As a result, Aave is now facing $280 million in bad debt with no direct way to recover it.
The impact on users was immediate. With Aave’s ETH pool reaching 100% utilization, the protocol has almost no ETH available for withdrawals. This means users trying to exit quickly may already be hitting liquidity limits.
As crypto portfolio manager Pratik Kala explained, the fear stemmed not from losses Aave itself created, but from the protocol being left with a deficit it didn’t cause—spurring withdrawals driven by uncertainty. Kala compared the behavior to a bank run, describing the mindset as “withdraw first, ask questions later.”
Since news of the hack broke on Saturday, Aave has seen roughly $9 billion in net outflows. Its total value locked plummeted by more than a third to about $17.5 billion. The damage extended beyond Aave, with DefiLlama data showing TVL across all decentralized lending protocols fell by nearly $13 billion within 48 hours.
As markets processed the fallout, Aave’s token also showed signs of strain. By Monday, AAVE had fallen about 26% from its one-month high of $118 reached the previous Friday. At the time of writing, AAVE was trading around $88. According to CoinGecko data, the token remains about 86% below its all-time high of $661.
In response, Aave has taken steps to limit further risk by freezing rsETH markets on its platform. Although the protocol stated on Sunday that its analysis shows rsETH traded on Ethereum is still fully backed, it has kept the restrictions in place as a precaution.
Frequently Asked Questions
Of course Here is a list of FAQs about the AAVE price drop linked to the Kelp DAO exploit designed to be clear and helpful for users of all experience levels
Beginner Definition Questions
1 What is AAVE
AAVE is a leading decentralized finance protocol that allows people to lend and borrow cryptocurrencies without a traditional bank Users can earn interest by supplying assets to its liquidity pools
2 What happened to AAVEs price
AAVEs token price dropped sharply following news of a major exploit involving a project called Kelp DAO which caused significant outflows from AAVEs pools
3 What is Kelp DAO
Kelp DAO is a separate DeFi project built on the EigenLayer ecosystem It allowed users to deposit a token called rsETH which was in part backed by assets borrowed from AAVE The exploit happened in Kelp DAOs system not directly in AAVEs
4 What does outflow mean in this context
An outflow is when a large amount of cryptocurrency is withdrawn from a platforms liquidity pools In this case nearly 9 billion worth of assets were rapidly pulled out of AAVE mainly to cover losses or reduce risk related to the Kelp DAO exploit
Mechanism Cause Questions
5 How did a problem in Kelp DAO affect AAVE
Kelp DAO used assets borrowed from AAVE as collateral When Kelp DAO was exploited large holders needed to repay their massive AAVE loans quickly To get the funds to repay they withdrew huge amounts of assets from AAVE causing a liquidity crunch and panic selling
6 Was the AAVE protocol itself hacked or exploited
No The AAVE protocols smart contracts were not breached The exploit occurred in a separate protocol AAVE was affected indirectly through the interconnected nature of DeFi where one protocols failure can create ripple effects
7 What is a liquidity crunch
Its a situation where there isnt enough readily available assets in a pool to meet sudden large withdrawal demands This can cause transaction delays higher fees and force sellers to accept lower prices driving the token price down