Decentralised finance markets rapidly repriced risk within 48 hours following the Kelp DAO exploit, which exposed structural weaknesses in lending protocols like Aave.
Before the incident, Aave stablecoin yields sat near 2.32%, below the US risk-free rate, but surged to over 13% as liquidity evaporated and users rushed to withdraw funds.
“The market did in real time what no regulator, auditor, or commentator had managed to do: it repriced DeFi credit risk,”
Said Di Bartolomeo.
The exploit involved minting unbacked rsETH tokens via infrastructure linked to LayerZero, allowing an attacker to borrow up to $230 million against invalid collateral.
The shock triggered $6 billion to $10 billion in outflows from Aave, with utilisation rates hitting 100% and leaving many users unable to withdraw funds or access liquidity.
The fallout spread across DeFi due to interconnected lending strategies, pushing yields higher on platforms like Morpho and wiping more than $13 billion from total value locked across major chains.
The episode underscored a fundamental difference between DeFi and traditional finance, highlighting the absence of bankruptcy protections or legal recourse and reinforcing that higher yields must reflect higher risk.