Aave, one of the largest decentralized lending protocols, is facing mounting pressure after a major exploit involving Kelp DAO’s rsETH token sparked a liquidity crisis and left the protocol with hundreds of millions in unbacked exposure. The incident caused a wave of outflows, severely straining Aave’s ETH pool and jolting the broader DeFi sector.
Liquidity shock after rsETH exploited
The situation began with a major breach affecting Kelp DAO’s rsETH token. Kelp DAO operates on Ethereum, offering restaked ETH services that allow users to participate in DeFi with liquid derivatives. The recent LayerZero bridge exploit saw attackers drain roughly 116,500 rsETH—assets worth about $292 million at the time.
Following the theft, the attacker supplied the stolen rsETH as collateral on Aave’s V3 lending markets, and then borrowed almost $236 million in wrapped ETH. Since the deposited rsETH was compromised and now perceived as invalid, Aave is now left with substantial undercollateralized, and likely unrecoverable, loans.
The immediate effect was a rapid spike in borrowing from Aave’s ETH pool, which reached full utilization. Nearly all ETH liquidity was withdrawn, hindering other users’ ability to access their funds and causing delays or failures for pending withdrawals.
The scale of the event overwhelmed Aave’s risk mitigation systems. Over $5.4 billion in ETH was reportedly withdrawn from the platform in a matter of hours. Among the high-value transfers, blockchain data flagged a withdrawal of over 65,000 ETH linked to TRON founder Justin Sun, a prominent blockchain entrepreneur and investor.
Aave, deployed on Ethereum and various other chains, leverages its Umbrella safety module to handle extreme scenarios, but the current exposure—estimated at $280 million in unrecoverable debt—has put severe strain on protocol safeguards and confidence across participants.
Weak price action and technical warning signs
AAVE, the protocol’s native token, mirrored the unfolding crisis with sharp volatility. After attempting to break out toward the $120 mark, AAVE faced stiff rejection and quickly dropped to trade around $93.90 on short-term charts.
Bulls initially tried to hold the price above support at $92, but further downside pressure sent AAVE lower, tracking sideways between $90 and $102 over several sessions. The latest failed rally revived selling, weighing on sentiment.
Technical signals add to the cautious outlook. The Relative Strength Index currently sits at 34.55, indicating near-oversold conditions but not a strong enough reversal point. AAVE’s price remains under its moving average, a typical sign of continued downward momentum.
Meanwhile, the MACD indicator remains negative, and the histogram has widened, showing ongoing selling pressure with no signal for a rebound yet. Critical support rests near $90, with $89.50 as a key level for further downside. Should this range collapse, lower targets between $85 and $80 could come into play.
Traders and analysts are keeping a close watch to see if buyers can step in to stabilize AAVE at current levels. Any significant bounce would likely require a shift in broader sentiment and improved market structure, especially as fallout from the exploit and liquidity crisis continues.
