On April 18, 2026, crypto hackers stole an estimated $290 million from major decentralized finance (DeFi) lending platforms, exposing some lenders to potential losses. In addition, the largest DeFi lending platform, Aave, experienced mass withdrawals to the point where some crypto lenders, including stablecoin lenders, were unable to withdraw their funds.
The hack not only exposed lenders to significant potential losses – it also highlights three inherent risks of DeFi lending. First, DeFi lending platforms are exposed to the risk that they receive inaccurate information – whether intentionally or not – from third-party sources. They rely on information from third parties that tell the platform whether a potential user has provided legitimate collateral and what that collateral is worth. Trusting third-party information that may be poorly verified exposes platform users to losses if loans are made against collateral whose value is misrepresented or potentially worthless. Second, the insurance fund some DeFi lending platforms use to compensate lenders in the event of loss appears to be inadequate, as warned by previous BPI analysis. Having inadequate capital and liquidity buffers renders DeFi platforms vulnerable to bank run dynamics. Finally, as BPI has described, mixers help enable criminals to act undetected in the ecosystem by obscuring the identities of wallet holders and crypto users.
All three of these risks persist as a result of inadequate regulatory and supervisory standards. These risks will endanger more customers in the future if left unaddressed in pending legislation or through regulatory action. To elucidate the severity and nature of these risks in the DeFi lending ecosystem, this note describes the KelpDAO hack, the run on Aave and the open question of who will bear the losses.
What Happened to KelpDAO
Hackers exploited a vulnerability on a crypto platform, KelpDAO, which allowed them to create crypto tokens, called rsETH, out of thin air (see Appendix for details). The hackers then pledged the rsETH as collateral on DeFi lending platforms, borrowing legitimate Ethereum tokens (ETH) against the rsETH. KelpDAO froze markets related to rsETH when it realized what happened. DeFi lending platforms then recognized the rsETH collateral as worthless. As a result, those who lent ETH to the hackers were left with worthless rsETH collateral, while the hackers “ran off” with the Ethereum tokens. Specifically, the hackers moved the stolen ETH to Tornado Cash, a well-known mixer, to obscure the trail and launder the stolen funds. Aave, the largest DeFi lending platform, was the main target of this scheme.
What Happened to DeFi Platform Aave
The hack on KelpDAO led to a run on Aave as lenders attempted to redeem the ETH they had lent. When lenders experience counterparty losses on the Aave platform, they are normally reimbursed by an insurance fund maintained by Aave. However, given the size of the losses to ETH lenders (due to major losses in the value of the rsETH collateral backing their loans[1]), investors feared that the insurance fund was not large enough to reimburse them in full and began to withdraw the ETH they had lent to Aave.
Investor fears were warranted: the value of the Aave insurance fund was between $80 and $100 million, while the exposure to potential losses was almost $200 million (link). However, the only way to withdraw a token lent on Aave is if some of the tokens are not already lent out and instead are sitting idle in a liquidity pool. After significant withdrawals, lenders stopped being able to withdraw their ETH because there were no more tokens sitting idly in liquidity pools. This is akin to bank depositors being unable to withdraw their account balances during a bank run.
The run extended beyond ETH lenders to lenders of other crypto assets, too. While only ETH lenders were directly exposed to losses, lenders of other crypto assets also withdrew from Aave for fear of being unable to withdraw those assets either. When ETH lenders are unable to recall their loans and obtain their tokens back, the Aave platform permits them to borrow other tokens, including stablecoins, against the ETH they have not been able to withdraw. As ETH lenders begin to borrow stablecoins en masse, stablecoin lenders anticipate that all coins will soon be lent out, leaving none in the relevant liquidity pool.[2] Stablecoin lenders then begin to fear that they will be unable to withdraw their coins if they wait too long, which prompts them to run pre-emptively. Indeed, stablecoin lenders withdrew $5 billion from Aave soon after the hack was announced (Exhibit 1).
Rapid Withdrawals Lead to Increased Interest Rates on DeFi Platforms
A run of this nature has happened before, and when it does, interest rates on DeFi platforms spike. While stablecoin borrowings surged as ETH lenders tried to borrow stablecoins against their stranded tokens, stablecoin lenders withdrew for fear of not being able to redeem their coins in the future. As a result of higher demand for and lower supply of stablecoin funding, stablecoin interest rates on DeFi platforms spiked to around 10 percent (Exhibit 2). This is consistent with prior spikes in stablecoin interest rates in response to crypto hacks. For instance, in October 2021, a hacker drained $130 million from a DeFi protocol, Cream Finance. Fearing that other DeFi protocols were vulnerable to the same hack, lenders rushed to withdraw their funds, and stablecoin interest rates spiked to nearly 12 percent (first circle in Exhibit 2). In July 2023, a hack on Curve Finance caused the value of its token to drop dramatically. Since a large amount of the Curve Finance token was posted as collateral on Aave, lenders withdrew from the protocol, fearing large potential losses from undercollateralized loans, leading to a spike in interest rates (second circle in Exhibit 2).
Who Will Bear the Losses?
The question remains of who will pay for the $100 – 120 million in losses that remain after the Aave insurance fund is fully depleted. A proposal on Aave’s public governance website outlines two scenarios in which lenders who were stolen from would distribute losses evenly among them. Other options could include Aave reimbursing lenders out of its treasury or raising additional debt or equity financing. Whatever path is taken, the risks associated with DeFi lending platforms remain.
Appendix: What is KelpDAO and how did the hack work?
KelpDAO is a restaking protocol. A user gives it an Ethereum token, ETH, and KelpDAO stakes it (akin to lending it to generate rewards) for the user. The receipt for staking ETH is a new token, rsETH, which can be traded or pledged on other crypto platforms.
KelpDAO uses a bridge service called OFT. Bridges like OFT are necessary in crypto because crypto assets often need to be transferred across different blockchains. To do that, liquidity providers take receipt of a token on one blockchain, destroy or burn it and create or mint a new equivalent amount of the same token on another blockchain.
The hackers tricked OFT’s messaging service (LayerZero) into issuing them rsETH by convincing the service that they had delivered ETH. (In reality, of course, the criminals had not actually delivered ETH.) The hack was possible because KelpDAO employs a weak validation system, only requiring one verifier to approve a message.
[1] The losses here are particularly significant because the value of the rsETH collateral is still undetermined. As discussed in a recent report by Aave, KelpDAO has not yet determined how to value the stolen rsETH. Under normal circumstances, if the value of collateral fell so that the loan became sufficiently risky (for example, if the loan-to-value were above a certain threshold), a liquidator would come in and sell the collateral to make the lender whole. If the value of the collateral were to fall particularly fast, the lender might be repaid only in part.
[2] Note that each token has its own separate liquidity pool. Lending a certain token adds it to the token-specific liquidity pool and borrowing it removes it from that same pool.
