On Tuesday, Aave, a leading decentralized lending platform, experienced an effective freeze when all its key lending protocols depleted their available funds. This left users unable to withdraw billions of dollars in cryptocurrency, according to DeFi Warhold, who explained that this 100% utilization signifies complete liquidity exhaustion.
Approximately $5 billion in stablecoins, specifically USDT and USDC, were locked, as stated by Warhold, highlighting the protocol’s inability to disburse these assets due to a lack of liquidity. The crisis unfolded on April 18 following a $292 million hack of the Kelp DAO rsETH bridge. Attackers exploited forged cross-chain messages to create unbacked rsETH, which was then used as collateral in Aave to borrow nearly $200 million in WETH. As news of this ‘bad debt’ circulated, panic ensued, triggering a withdrawal frenzy that saw $6.6 billion exit the protocol within 24 hours.
Aave founder Stani Kulechov, when contacted by CoinDesk via WhatsApp for his thoughts on the crisis, stated: “I do not have anything useful to say.” DeFi Warhold described 100% utilization across all markets as a ‘full stop,’ indicating no liquidity for withdrawals and halting liquidations. Consequently, $3 billion in USDT and $2 billion in USDC became inaccessible with no feasible exit strategy.
The situation worsened as DeFi Warhol noted that any price fluctuations could exacerbate the bad debt without a mechanism to address it. He warned that this is the most perilous scenario for a lending protocol, as it cannot safeguard against additional bad debt when liquidations fail.
Natalie Newson, a senior blockchain security researcher at CertiK, emphasized Aave’s dire predicament, stating that 100% utilization not only reflects liquidity issues but also disables the platform’s self-defense mechanisms. Without liquidity for liquidations, undercollateralized positions remain unresolved, leading to an accumulation of bad debt and necessitating external assistance for recovery.
“Aave wasn’t hacked; it was paralyzed due to the repercussions from another bridge’s failure,” Newson remarked, stressing that the KelpDAO exploit tested DeFi systems collectively. She concurred with Warhol that innocent users are now burdened with these risks and pointed out that DeFi’s interconnectedness, while advantageous, transforms isolated failures into widespread crises.
Aave’s risk framework had anticipated 100% utilization issues; Alex Bertomeu-Gilless, a former Aave Risk Manager, warned in 2020 that at this level, no liquidity remains, resulting in problematic situations for depositors unable to withdraw funds.
Technical analyst and crypto author Duo Nine was the first to report Aave’s full utilization. Following the rsETH exploit and subsequent bad debt on Aave, influential entities like Justin Sun and MEXC exchange swiftly withdrew billions. Initially affecting the ETH market, which reached 100% utilization, this soon extended to USDT and USDC pools as more than $6 billion in assets departed within hours, locking those markets with trapped funds.