Aave’s total deposits have fallen below the $30 billion threshold following a sharp liquidity contraction across the decentralized finance sector. Specifically, the amount of money deposited into the protocol currently totals $29.6 billion, indicating a sharp decline driven by user reluctance and capital withdrawals amid rising risks.
Before this, the deposit balance of Aave was around $45.8 Bilion, showing that in a matter of days, the capital supply has declined significantly. The cause of the drop was the security vulnerability detected in KelpDAO’s rsETH token, prompting users to withdraw their funds to avoid losses.
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Outflows amounted to $16.2 billion for the period analyzed, resulting in the loss of more than a third of Aave’s deposits. Within one day, the outflows from Aave reached $6.6 billion as users rapidly withdrew funds due to rising uncertainties regarding the compromised collateral.
Aave experienced approximately $15.1 billion in total outflows within a span of three and a half days, causing its TVL to decline sharply from $48.5 billion to $30.7 billion.
According to DefiLlama, the broader DeFi shift also impacted competing protocols. Morpho recorded outflows of $1.5 billion, while SparkLend attracted $1.3 billion in new deposits, with a portion of these inflows likely originating from large investors who previously exited Aave.
Meanwhile, Aave’s on-chain revenue has dropped significantly, falling from $1.1 million in early February to $625,000 by Monday, highlighting weakening protocol activity.
At the time of writing, the AAVE token is trading near $92.05, holding slightly above its critical support level of $90.47, while facing resistance around the 20-day EMA at $98.80.
The situation escalated after attackers managed to exploit a LayerZero V2 bridge vulnerability, allowing them to drain roughly $293 million worth of rsETH. These tokens were utilized as collateral on Aave v3, allowing the attacker to withdraw nearly $200 million in wrapped Ether.
Liquidity conditions worsened as key pools, including ETH, USDT, and USDC, reached 100% utilization. In this situation, it was impossible to withdraw any of the funds since the pools had no remaining capacity. Overall, this highlighted the critical condition of the DeFi ecosystem.
The protocol has frozen its rsETH reserves, set the Loan-to-Value ratio to zero, and changed the interest rates accordingly. At the same time, the total value locked in the protocol kept decreasing while competitor platforms reported new inflows of funds as users moved their capital elsewhere.
Now the DeFi market experiences heightened scrutiny with regard to smart contract exploits and cross-protocol collateral risks. Future growth prospects for Aave will depend on the protocol’s ability to restore user confidence and improve the current state of liquidity.
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