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Aave, a major decentralized finance (DeFi) lending protocol, has been hit by a liquidity crunch after an external security exploit triggered a rapid withdrawal wave that effectively paralyzed parts of its core markets.
The incident began on April 18, when malicious actors exploited a critical flaw in a LayerZero V2 bridge connecting Unichain and Ethereum. The attackers siphoned approximately $293 million in rsETH from Kelp DAO while failing to burn the corresponding tokens on the originating blockchain.
The compromised rsETH was then deposited into Aave V3 as loan collateral. Using that collateral position, the attacker borrowed close to $200 million in WETH. After the community identified the collateral as unbacked, withdrawals accelerated quickly.
Within a 24-hour period, more than $6.6 billion left Aave. Withdrawals included activity from prominent market participants such as Justin Sun and the cryptocurrency exchange MEXC.
Initially, the ETH lending pool reached 100% utilization, followed by USDT and USDC markets. In lending protocols, 100% utilization indicates liquidity exhaustion—users cannot withdraw, and the protocol cannot execute liquidations on underwater positions.
DeFi analyst DeFi Warhol said the outcome was effectively “no liquidity available for withdrawals,” adding that liquidation processes could not be carried out. He estimated that approximately $3 billion in USDT and $2 billion in USDC remained trapped without viable withdrawal options.
CertiK senior blockchain security analyst Natalie Newson said the situation was more severe than a simple liquidity shortage. She explained that 100% utilization also meant Aave’s self-defense systems were down: with zero available liquidity, positions without adequate collateral could not be liquidated, allowing bad debt to accumulate.
Newson also stated that Aave itself was not directly compromised, but became stuck due to the fallout from the bridge failure. Risk assessment firm LlamaRisk projected potential bad-debt scenarios ranging from $123.7 million to $230.1 million.
Aave’s governance responded by freezing rsETH reserves, reducing loan-to-value parameters to zero, and modifying interest rate curves. However, the total value locked (TVL) decline had already occurred.
AmberCN’s April 22 analysis reported that cumulative outflows from Aave across roughly three and a half days totaled $15.1 billion. Over the same period, Aave’s TVL fell from $48.5 billion to $30.7 billion.
Morpho recorded $1.5 billion in withdrawals during the period, while SparkLend attracted $1.3 billion in new deposits. The analysis noted speculation that some of that inflow may have come from large holders moving away from Aave.
Aave’s daily on-chain revenue declined from $1.1 million in early February to $625,000 as of Monday.
When contacted by CoinDesk for comment, Aave founder Stani Kulechov replied: “I do not have anything useful to say.”
The AAVE token was trading around $91.22, positioned just above critical support at $90.47. Immediate resistance was cited at the 20-day EMA near $98.80.
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