Aave deposits fall by $15B as Kelp exploit sparks flight from DeFi lender

The episode highlights how DeFi’s interconnectedness is a double-edged sword, as the Kelp DAO exploit spread across lending markets and escalated into a “broader liquidity crunch,” Tanay Ved, senior research associate at Talos, told Cointelegraph.

She said the asset bundled risks across restaking, bridging and lending layers, allowing the impact to spread far beyond the initial exploit, adding that the incident reinforces the need for a more robust collateral framework and a more holistic security approach to address the systemic vulnerabilities of yield-bearing assets.

Aave v3 Market Utilization Rate percentage across USDC, USDT, WETH, USDe. Source: Talos

Aave said it had unfrozen WETH reserves on the Ethereum Core V3 market on Tuesday, enabling users to supply WETH to the V3 lending protocol, but WETH reserves across Ethereum Prime, Arbitrum, Base, Mantle and Linea remain frozen.

Related: Kelp DAO attacker moves $175M in Ether after exploit: Arkham

Traders bet Kelp DAO won’t socialize losses

On Monday, Aave’s risk manager outlined two potential scenarios for addressing the bad debt. The first scenario involves spreading the losses across all rsETH token holders on Ethereum mainnet and layer-2s, leaving about $123 million in bad debt on Aave.

The alternative would shift the shortfall entirely to layer-2 networks, resulting in about $230 million in bad debt on Aave.

Traders took to prediction markets to bet on the outcome, with 20% of traders wagering on Kelp DAO socializing the losses across rsETH holders on mainnet, rather than L2 holders bearing the shortfall, Polymarket data shows.

Magazine: 53 DeFi projects infiltrated, 50M NEO tokens could be ‘given back’: Asia Express