Aave Faces Liquidity Crunch as KelpDAO Exploit Triggers $300 Million Borrowing Spike

Aave is experiencing a severe liquidity squeeze following a security breach at KelpDAO, forcing desperate users to take loans against their own assets to access funds. The crisis began when an attacker manipulated KelpDAO's bridge infrastructure to release 116,500 rsETH—approximately 18% of the token's circulating supply—worth roughly $292 million. These unbacked tokens were immediately deposited into lending protocols, primarily Aave, to borrow real assets such as wrapped ether (wETH). This 'fake tokens in, real money out' strategy effectively drained liquidity from the vaults. In response, Aave froze rsETH markets on V3 and V4 to prevent further losses, confirming that its own contracts remained uncompromised. However, the freeze and subsequent rush of withdrawals by large holders pushed stablecoin pool utilization to 100%. With the pools maxed out, depositors found themselves unable to withdraw their funds. According to Chaos Labs data, this led to a $300 million spike in borrowing against Tether (USDT) deposits within 24 hours, as users took loans against their own collateral simply to obtain liquidity. Industry analysts suggest this surge in borrowing is a sign of distress rather than organic demand. The event underscores the fragility of the 'yield on yield' re-staking model, where a failure in a single receipt token can trigger a chain reaction that locks exits across the broader decentralized finance ecosystem.