Aave price dropped hard after the Kelp DAO hack turned a bridge exploit into a wider DeFi liquidity crisis. The attack began when about 116,500 rsETH, worth roughly $292 million, was drained from Kelp DAO’s LayerZero bridge. Those tokens were then used as collateral on Aave V3 to borrow large amounts of WETH. That move left Aave exposed to bad debt after the rsETH tied to the exploit could no longer be treated as normal collateral.
The key point is simple. Aave was not hacked at the smart contract level, but it still took a major hit because the attacker brought damaged collateral into its lending system. In DeFi, that can be enough to trigger a crisis. Once users saw the size of the hole, they rushed to pull funds from the protocol. That pressure appears to be one of the main reasons Aave price fell so sharply over the weekend.
The panic was not limited to traders selling the token. It spread to depositors trying to withdraw assets from Aave’s core markets. Reports and governance posts showed that several major pools reached 100% utilization, which means all available liquidity had been borrowed out. When that happens, users cannot make normal withdrawals until liquidity returns. That turned a bad debt problem into a liquidity problem.
This is where the story became much worse. Early withdrawals by large players drained the easiest exit routes first. After that, users who stayed behind found themselves stuck in crowded markets with little or no available liquidity. That appears to have affected not only ETH markets but also major stablecoin pools such as USDT and USDC. In practical terms, some users could still see their balances on Aave, but getting the money out became much harder.
That created a second layer of risk. If core pools remain fully utilized, liquidations can become harder to process during a fast market move. In a lending protocol, liquidations are meant to keep bad debt from growing. But if there is not enough usable liquidity in the right market, that safety valve starts to weaken. In a flat market, that problem can stay hidden for a while. In a sharp sell-off, it can get serious very fast.
Some ETH depositors still had a narrow exit. They could sell their interest-bearing aTokens, such as aETH-linked positions, on decentralized exchanges at a discount. That is not a clean withdrawal. It is more like paying a fee to escape early. Stablecoin users had fewer options. Some tried to borrow against locked USDT or USDC positions and leave through other assets, often at a steep loss. That kind of behavior shows how quickly a liquidity squeeze can spread across a lending system.
Aave also faced a trust problem. Even users with no direct exposure to rsETH had to think about whether the protocol itself could absorb the damage. Estimates of bad debt varied across reports, with many placing it above $190 million and some even higher depending on how losses are measured. That uncertainty pushed more users to leave first and ask questions later. As more funds left, more markets moved closer to full utilization, which deepened the sense of crisis.
The damage also spread beyond Aave. Compound paused several markets in response to the Kelp DAO hack, while other DeFi apps reviewed their own exposure. That matters because many protocols use Aave as a base layer for lending, yield products, and treasury management. If liquidity gets trapped on Aave, the problem does not stay on Aave. It can affect other apps and users that rely on it behind the scenes.
Aave responded by freezing rsETH and wrapped rsETH markets to stop new risk from building. That was a containment step, not a full solution. The bigger issue is who takes the loss and how confidence returns. Kelp DAO, Aave governance, service providers, and users are now all part of that debate. For now, Aave price reflects more than market fear. It reflects a larger question hanging over DeFi: what happens when one broken asset jams the plumbing of the whole system.
