Cryptocurrencies,  Security,  Staking

Aave Depositors Stuck As Bad Debt Piles Up

Lending market is the victim in the $292M Kelp DAO hack

By  / April 21, 2026 /

Lending market Aave stands to be saddled with as much as $230 million worth of bad debt in the wake of a $292 million hack of the Kelp DAO crosschain bridge. And it could get worse.

That’s according to LlamaRisk, Aave’s risk management provider, which outlined two scenarios for the amount of bad debt the lending market will be saddled with. One leaves it with $230 million and another with $123 million.

Aave is the fault-free victim of the hack, in which $292 million worth of a token called rsETH was created out of thin air on Kelp DAO and then moved onto Aave, where the hackers took out loans using the fake collateral.

Right now Aave is helpless as it waits to see how Kelp DAO allocates the shortfall. If Kelp DAO shares the damages across all rsETH holders, Aave will be looking at $123 million in bad debt. If it assigns the losses only to layer 2 blockchains like Arbitrum, Aave is looking at the whole $230 million.

But it gets worse. Due to the bank-run style withdrawals on Aave immediately following the hack, the lending protocol is now stuck at 100% utilization across all markets, which means users with roughly $5 billion in USDC and USDT stablecoins locked in Aave lending pools have no way to withdraw them as there is no liquidity.

That also means that there is no way to liquidate borrowers’ capital if they default on their loans, which means more bad debt will pile up as the situation goes on.

“100% utilization is the worst state a lending protocol can be in, and it’s not just a liquidity problem,” well-known commenter DeFi Warhol said in an X post. “When liquidations cannot execute, the protocol has no way to protect itself against further bad debt.”

He added, “[d]epositors are the least at fault here, and they’re carrying the most immediate risk. I never believed I would see Aave in this situation, but here we are.”

Separately, $71 million of the stolen tokens were frozen by the Ethereum layer 2 blockchain Arbitrum in a controversial act of good citizenship. Many in the crypto community don’t approve of blockchains interfering with users’ tokens under any circumstances as it undermines decentralization.

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics.