Aave TVL Drops $8 Billion After Kelp DAO Hack Triggers DeFi Liquidity Crunch

Liquidity risks across decentralized finance came into focus after total value locked, or TVL, on lending protocol Aave plunged in the wake of the Kelp DAO hack.

Cointelegraph reported on April 20 that Aave’s TVL fell to about $18.6 billion from roughly $26.4 billion over the weekend, erasing about $8 billion. The drop also stripped Aave of its position as the largest DeFi protocol.

The decline came after funds linked to the Kelp DAO hack were used for borrowing on Aave. Hackers stole about $293 million of rsETH and used it as collateral to borrow wETH on Aave v3. That is estimated to have created about $195 million in bad debt.

The fallout prompted heavy investor withdrawals and worsened the liquidity squeeze. Aave v3’s Tether and USDC lending pools in particular reached 100% utilization, leaving about $5.1 billion of stablecoins difficult to withdraw until new liquidity enters the pools or loans are repaid.

Lookonchain data showed that major whale investors, including crypto exchange MEXC and Abraxas Capital, withdrew about $431 million and $392 million, respectively. AAVE also slumped about 20%.

To contain the fallout, Aave froze markets tied to rsETH. It also temporarily suspended the wETH market across major networks including Ethereum, Arbitrum, Base, Mantle and Linea. Related protocols including Curve Finance, Ethena and BitGo WBTC also halted some functions.

The episode illustrates how close links among DeFi protocols can accelerate the spread of risk. It also shows how a single hack can quickly spill over into the broader lending market and evolve into systemic risk.

The incident marks the first major test of Aave’s Umbrella security model, introduced in 2025. The model is designed to protect against bad debt through an automated structure, but its response in a real crisis still requires further verification.