After the KelpDAO Hack, AAVE’s Situation Is Worse Than You Think

Original Compilation: TechFlow

I don’t think people realize how bad the situation at @aave is right now.

All core markets have reached 100% utilization, including $3 billion in USDT and $2 billion in USDC being stuck!

This means you cannot withdraw your funds.

A long thread explaining why and how we got here.

When the rsETH exploit happened and AAVE incurred bad debt, whales like Justin Sun, MEXC exchange, and others immediately withdrew billions from AAVE.

This instantly drained all available liquidity from key core markets like ETH, USDT, USDC, etc. The first to withdraw escaped, those who were slower got trapped.

Initially, the ETH market reached 100% utilization, meaning you couldn’t withdraw your ETH from AAVE.

Worse, it also meant the protocol couldn’t process ETH liquidations if the ETH price dropped/crashed. If you can’t sell any ETH, you can’t liquidate to cover debt obligations.

This means the risk of AAVE generating more bad debt increases as its markets remain stuck.

Despite this, users could still sell aETHwETH tokens on Uniswap or similar aggregators at a small loss. This was the last exit door for ETH depositors on AAVE.

USDT and USDC depositors couldn’t do this. They are trapped.

This is because AAVE lost over $6 billion in liquidity in the past 24 hours. As whales pulled their funds, USDT and USDC also reached 100% utilization.

These markets are now also stuck, with funds locked. Panic is spreading, and desperate times call for desperate measures.

Some users decided to borrow USDT/USDC as collateral to exit through other markets at a 10-25% loss (90-75% LTV). Essentially, you borrow GHO/DAI/USDe against your locked USDT/C.

But as more liquidity leaves AAVE, more markets reach 100% utilization and get locked/stuck due to low liquidity. This is quickly spreading to all available markets.

Fortunately, the kripto market is fairly flat today, so liquidation risk is minimal, but if things change, the billions in stablecoins and other assets locked on AAVE won’t be able to handle liquidations = more bad debt for AAVE.

If trapped users or related protocols need access to their funds to prevent liquidations or other critical functions, they face huge problems.

Furthermore, no one wants to deposit (or provide liquidity) in these markets now because your ETH, BTC, USDC/T could get stuck there, who knows for how long.

As soon as any available liquidity appears, it’s instantly snatched by bots scrambling to escape. As I write this, I see $250k in USDC liquidity disappearing in seconds.

Then there’s the bad debt issue.

AAVE incurred over $200 million in bad debt through rsETH, which is like a hot potato. No one knows who will ultimately foot this bill.

If you haven’t removed your assets from AAVE, you risk receiving a portion of this bill in some form. Not being able to access your funds is part of that risk.

The contagion is also extremely high.

Many protocols and apps rely on AAVE for their yield mechanisms. These protocols and their users are also trapped and may be forced to incur bad debt for no reason.

October 10th was a CEX-driven crash, an epic failure of DeFi risk mitigation.

AAVE should never have introduced rsETH as a collateral asset, at least not to the tune of hundreds of millions of dollars, which allowed the hacker to borrow over $200 million in ETH after posting fake collateral.

Rumors on X suggest rsETH was introduced by AAVE due to a conflict of interest (lobbying) with a certain service provider. If true, this is a major failure of its governance structure (nothing new).

The @KelpDAO team managing rsETH also faces a tough decision: who will actually pay for the $200 million exploit. AAVE users? L2 rsETH users? Will everyone affected get haircut to cover the loss?

The AAVE team and its founder Stani have remained silent for over 20 hours since initially announcing the freezing of the rsETH market after the exploit.

They have a rather large problem on their hands because the entire protocol is now at risk. Trust is lost as AAVE’s TVL is bleeding billions, to the point where all core markets have reached 100% utilization.

Perhaps some key players in the space will step in to provide liquidity to stabilize the markets on AAVE before things get worse.

I was lucky to escape AAVE early when I first saw this. I also removed all assets from DeFi and won’t touch any protocol for the next few weeks. The risk is too great for a few percentage points of yield.

Artikel ini bersumber dari internet: After the KelpDAO Hack, AAVE’s Situation Is Worse Than You Think

Related: Institutional Adoption of Prediction Pasars Stuck at the Third Stage

Compiled by | Odaily (@OdailyChina); Translator | Asher (@Asher_ 0210) Editor’s Note: At the end of March this year, the prediction market, once considered a niche field, reached a critical juncture. Kalshi Research, the research arm of Kalshi, hosted its inaugural research conference in New York, bringing together academics, Wall Street executives, former politicians, and frontline traders. The composition of the attendees sent a clear signal—prediction markets are moving from the fringe to the mainstream. The conference opened with a conversation between Kalshi co-founders Tarek Mansour and Luana Lopes Lara, moderated by Bloomberg journalist Katherine Doherty. This article excerpts and summarizes the key insights from the conference. Prediction Markets Are More Than Just Elections and Sports For a long time, prediction markets have been defined by certain “highlight moments”—U.S. elections,…