Analysis suggests the DeFi TVL loss of $13 billion is due to a chain of liquidations, not actual losses.
Recently, DeFi has faced severe tests, with KelpDAO suffering a targeted attack on its infrastructure, leading to a loss of about $292 million in assets, subsequently triggering a significant drop in the market's total locked value (TVL) of around $13 billion. Despite the seemingly disastrous data, analysts point out that the primary cause of the capital reduction stems from the chain liquidations of leveraged positions and asset rotations. DeFi is not dead; it still demonstrates resilience under extreme pressure. The hacker's attack path has shifted from smart contracts to infrastructure. This KelpDAO attack differs from past incidents involving smart contract vulnerabilities, as it primarily targeted the LayerZero verification infrastructure. According to preliminary investigations, this incident is suspected to be related to the North Korean hacker group Lazarus Group. KelpDAO employed a single-validator architecture, and despite multiple prior recommendations for defensive configurations, its centralized structure led to its issued liquidity-staked token rsETH losing adequate collateral. This phenomenon triggered market concerns about bad debt spreading to large lending protocols like Aave's WETH pool. When the attack surface expands from the code level to the underlying infrastructure, the on-chain system's risk premium increases, forcing investors to reassess the potential costs of storing assets in decentralized protocols. Leverage amplifies price volatility. Data shows that DeFi's total locked value plummeted by $13 billion within 48 hours; however, this figure includes a large amount of duplicated virtual value. Taking Aave, the leader in the lending market, as an example, prior to the attack, users widely adopted looping strategies—depositing liquidity to re-stake tokens, borrowing ETH, and then exchanging it for more tokens to amplify rewards. This leverage effect boosts TVL during stable market conditions but can trigger a severe liquidation wave when collateral concerns arise. Although it appears that hundreds of millions have been lost on paper, the actual net capital loss is only a small fraction of that. Additionally, the current natural yield rates in the DeFi space are generally low, with Aave's USDC deposit annualized yield at about 2.61%, even lower than traditional financial institutions like Interactive Brokers at 3.14%. This has led developers to leverage to fill the reward gap, further exacerbating volatility during such events. Historical cases validate that DeFi has the capacity for recovery. Over the past few years, DeFi has faced multiple larger incidents, including the Terra collapse, and hacks of Wormhole and Ronin bridges, with losses in the billion-dollar range. Even after such massive capital withdrawals, core protocols have been able to gradually restore trust through treasury asset compensation, loan adjustments, and community governance. DefiLlama founder 0xNGMI pointed out that although protocols like Aave experienced massive capital outflows in a short period, this resembles a redefinition of risk assets rather than a total collapse. Historical experience shows that when market sentiment stabilizes, capital usually flows back due to cost considerations and potential rewards. Currently, while Aave faces liquidity pressure, it has sufficient adjustment mechanisms to protect the integrity of the protocol. During the KelpDAO incident, the market observed a significant capital transfer phenomenon. The SparkLend protocol maintained sufficient ETH withdrawal liquidity by preemptively removing risk assets such as rsETH, with its total locked value growing from $1.8 billion to $2.9 billion over the weekend, reflecting that capital has not fully retreated from the on-chain ecosystem but is instead seeking safer havens. This article suggests the DeFi TVL loss of $13 billion is due to a chain of liquidations, not actual losses, first appearing at <a>...</a>.
Recently, DeFi has faced severe tests, with KelpDAO suffering a targeted attack on its infrastructure, leading to a loss of about $292 million in assets, subsequently triggering a significant drop in the market's total locked value (TVL) of around $13 billion. Despite the seemingly disastrous data, analysts point out that the primary cause of the capital reduction stems from the chain liquidations of leveraged positions and asset rotations. DeFi is not dead; it still demonstrates resilience under extreme pressure. The hacker's attack path has shifted from smart contracts to infrastructure. This KelpDAO attack differs from past incidents involving smart contract vulnerabilities, as it primarily targeted the LayerZero verification infrastructure. According to preliminary investigations, this incident is suspected to be related to the North Korean hacker group Lazarus Group. KelpDAO employed a single-validator architecture, and despite multiple prior recommendations for defensive configurations, its centralized structure led to its issued liquidity-staked token rsETH losing adequate collateral. This phenomenon triggered market concerns about bad debt spreading to large lending protocols like Aave's WETH pool. When the attack surface expands from the code level to the underlying infrastructure, the on-chain system's risk premium increases, forcing investors to reassess the potential costs of storing assets in decentralized protocols. Leverage amplifies price volatility. Data shows that DeFi's total locked value plummeted by $13 billion within 48 hours; however, this figure includes a large amount of duplicated virtual value. Taking Aave, the leader in the lending market, as an example, prior to the attack, users widely adopted looping strategies—depositing liquidity to re-stake tokens, borrowing ETH, and then exchanging it for more tokens to amplify rewards. This leverage effect boosts TVL during stable market conditions but can trigger a severe liquidation wave when collateral concerns arise. Although it appears that hundreds of millions have been lost on paper, the actual net capital loss is only a small fraction of that. Additionally, the current natural yield rates in the DeFi space are generally low, with Aave's USDC deposit annualized yield at about 2.61%, even lower than traditional financial institutions like Interactive Brokers at 3.14%. This has led developers to leverage to fill the reward gap, further exacerbating volatility during such events. Historical cases validate that DeFi has the capacity for recovery. Over the past few years, DeFi has faced multiple larger incidents, including the Terra collapse, and hacks of Wormhole and Ronin bridges, with losses in the billion-dollar range. Even after such massive capital withdrawals, core protocols have been able to gradually restore trust through treasury asset compensation, loan adjustments, and community governance. DefiLlama founder 0xNGMI pointed out that although protocols like Aave experienced massive capital outflows in a short period, this resembles a redefinition of risk assets rather than a total collapse. Historical experience shows that when market sentiment stabilizes, capital usually flows back due to cost considerations and potential rewards. Currently, while Aave faces liquidity pressure, it has sufficient adjustment mechanisms to protect the integrity of the protocol. During the KelpDAO incident, the market observed a significant capital transfer phenomenon. The SparkLend protocol maintained sufficient ETH withdrawal liquidity by preemptively removing risk assets such as rsETH, with its total locked value growing from $1.8 billion to $2.9 billion over the weekend, reflecting that capital has not fully retreated from the on-chain ecosystem but is instead seeking safer havens. This article suggests the DeFi TVL loss of $13 billion is due to a chain of liquidations, not actual losses, first appearing at <a>...</a>.