A weekend exploit targeting KelpDAO’s rsETH token has sent shockwaves through decentralized lending markets, triggering a $300 million borrowing surge on Aave within 24 hours of the attack. The supporting evidence appears in the cited X post.
The incident drained roughly $292 million in value after an attacker deposited unbacked tokens into Aave and borrowed real assets against them.
In the immediate aftermath, whales pulled more than $6 billion from Aave, pushing major pools including ETH, USDT, and USDC to 100% utilization. With no liquidity left to redeem, depositors found themselves unable to withdraw their own funds.
Trapped Depositors Resort to Borrowing Against Their Own Collateral
The $300 million borrowing spike recorded in the 24 hours following the attack does not reflect new demand. It reflects desperation.
Stranded users began borrowing against their own locked USDT deposits at a loss simply to access any liquidity at all, according to data from Chaos Labs.
monetsupply.eth, the pseudonymous head of strategy at Spark, a rival DeFi lending platform, described the dynamic in a post on X: “We’re now seeing some negative secondary effects of illiquidity in Aave stablecoin markets. Because users can’t withdraw due to 100% utilization, there has been a ~$300 million increase in borrowing with USDT collateral in just the past day since the rsETH exploit.”
The analogy is straightforward: imagine a bank refusing withdrawal requests, so customers take out loans against their own deposits just to access cash. That credit creation is not a sign of healthy demand.
It is a distress signal.
How One Exploit Froze Multiple Markets Simultaneously
Aave functions as a decentralized lending protocol where users deposit assets to earn interest and others borrow against overcollateralized positions. Under normal conditions, interest rates adjust automatically to balance supply and demand.
When utilization hits 100%, that mechanism breaks down entirely.
The KelpDAO attacker exploited the collateral system by depositing unbacked rsETH tokens and borrowing legitimate assets against them.
As the scale of the attack became clear, large holders rushed to exit Aave simultaneously, collapsing available liquidity across stablecoin pools faster than the rate mechanism could respond.
The result was a cascade: genuine depositors who played no role in the exploit found their funds effectively frozen. The $300 million borrowing figure, sourced from Chaos Labs, captures the scale of that secondary freeze.
Each loan taken out at a loss represents a depositor paying to access money they already own.
The episode underscores a structural vulnerability in shared liquidity pools. When a single protocol’s token becomes a vector for draining collateral, the fallout does not stay contained to that protocol.
It travels through every market where that collateral touches real assets, with ordinary depositors absorbing the impact last.
Not Financial Advice: This article is for informational purposes only. Crypto investments are highly volatile. Always do your own research.
