Aave, the leading DeFi lending protocol, is flashing severe liquidity warnings as its major vaults hit 100% utilization—effectively locking providers from withdrawing funds. The crisis centers on WETH, Ethereum's most liquid wrapped token, with stablecoin pools also nearing depletion, raising immediate concerns about systemic risk in decentralized finance.

Aave experiences peak outflow

Aave experienced the third-largest outflow in history, with $5B moved through the Ethereum network. The protocol is still checking for bad debt, which may exacerbate the losses from the KelpDAO hack. According to early estimates, Aave may carry up to $196M in bad debt, due to the usage of illiquid rsETH used to borrow WETH. Part of the outflow may come from the exploiters taking out WETH to liquidate and disguise funds.

The outflows diminished the total value locked on Aave to $17.5B, down from a recent peak above $25B. The recent KelpDAO hack showed that Aave did not react automatically to all market-shaking events, but the results depended on exposure. 

As the exposure to KelpDAO’s rsETH threatened liquidity, users turned to safer assets like WETH and stablecoins. The recent incident shows that DeFi lending is at risk due to the increase in large Web3 hacks. The attacks against Drift Protocol and KelpDAO in less than a month put WEB3 security at the forefront, especially in cases of significant liquidity accumulation. 

The effects on Aave may affect DeFi as a whole, as the lending protocol was the main venue for reliable vaults. The recent outflows signal that DeFi as a whole may be at risk, as it concentrates on major protocols. As Cryptopolitan reported, a DeFi contagion may spread to L2 and other protocols. 

Aave liquidity declined even before the KelpDAO hack

In the past month, even without the recent outflows, Aave liquidity declined by around 25% or over $20B. Stablecoin liquidity is also down by 35%, and borrowing is down 10%. 

AAVE tokens were in decline for the past quarter, sinking from a local high of $157. Following the outflows, AAVE crashed from $112 down to $92. 

At the same time, Aave proved relatively resilient as the utilization was only peaking in a handful of markets. The platform carries 215 lending vaults or markets, with an average utilization rate of 37%. 

DeFi lending usually works better during bull markets, but the latest outflows may test Aave’s resilience. Even with relatively stable ETH prices above $2,300, the bad debt and rapid outflows will put pressure on the protocol.

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