Kelp DAO Hack Triggers Aave Liquidity Crisis

A recent cyber attack on Kelp DAO has caused significant disruption in the decentralized finance (DeFi) sector, with a liquidity crisis unfolding on Aave as a direct consequence of the exploit.

The incident occurred when attackers manipulated rsETH through a LayerZero-based bridge, which allowed them to borrow funds from Aave. This created 'massive bad debt' on the platform, leading to 100% utilization rates and draining available liquidity.

Aave was forced to freeze affected markets while Kelp DAO paused rsETH contracts across multiple networks to investigate the breach. The fallout resulted in $6.2 billion in net withdrawals from Aave as users rushed to exit positions and protect their funds.

The incident has raised fresh concerns about DeFi security and systemic risk, with critics warning that such incidents could undermine confidence in decentralized financial systems. As a result of the exploit, Aave's governance token price fell by 16% and Ethereum dropped by 2%, reflecting broader market stress.