Decentralized Finance (DeFi) lending protocol Aave, a prominent leader in this space, experienced a plunge in total value locked (TVL) by nearly $8 billion in just one day due to a $293 million hack related to Kelp DAO’s LayerZero-enabled bridge. This kind of situation demonstrates how a single security breach can cause a ripple effect across interconnected DeFi markets, testing the liquidity measures and risk frameworks not only within one blockchain ecosystem but across multiple ones.
In parallel with the Aave token plunging nearly 20% to $89.5, the stablecoin pools are also under such strain that their utilization levels have reached critical levels. The event serves as the first significant challenge of Aave’s “Umbrella” security paradigm, which was unveiled in June 2025 to offer a more hands-off way of dousing any potential protocol bad debt.
Breakdown of the Event
An attack on Kelp DAO’s bridge resulted in a loss of 116,500 Kelp DAO Restaked ETH (rsETH) tokens, which were worth a staggering $293 million at the time of theft. On Aave v3, the hackers employed the stolen rsETH to obtain wrapped Ether (wETH) loans without repaying, thereby accruing roughly $195 million in bad debt. This was revealed by crypto analytics platform Lookonchain.
A few hours after the incident, DeFiLlama data captured Aave’s TVL dropping from $26.4 billion down to $18.6 billion while on the same day the protocol lost its top spot. Huge withdrawals like $431 million from MEXC and $392 million from Abraxas Capital have demonstrated institutional moves aimed at mitigating counterparty risk.
They locked rsETH markets on v3 and v4 and stopped wETH reserves on Ethereum Arbitrum Base, Mantle, and Linea. The company stated that rsETH on the Ethereum mainnet remains fully backed in spite of the freeze.
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Stable Pools Have Been Fully Utilized
At one point, the USDt and USDC pools of Aave v3 reached 100% utilization, essentially locking up more than $5.1 billion of stablecoins until new liquidity is brought in or loans are repaid. At one point, only $2,540 was available from the $2.87 billion USDT pool, which is a clear indicator of liquidity stress.
The protocols related to rsETH or the LayerZero bridge, such as Curve Finance, Ethena, and BitGo’s Wrapped Bitcoin (WBTC), stopped bridge usage, which is a sign of cross-protocol contagion risk.
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Risk Model Under a Magnifying Glass
The theft puts in question Aave’s Umbrella model, which is a mechanism to automate bad debt protection whilst enabling a reward system for users. The Bank of Canada pointed out recently that Aave v3 ended a situation of bad debt through overcollateralization and automated liquidations. Aave defended its model that is based on liquidation, saying it not only safeguards lenders but also limits the losses of borrowers.
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