Analysis of the Microstructure of Aave Lending Markets

Author: Tanay Ved, Senior Researcher at Coin Metrics; Translation: Shaw, Golden Finance

Key Summary

• The KelpDAO vulnerability attack served as a stress test for the Aave lending market, exposing how collateral risk can propagate within shared liquidity pools.

• Within just a few hours, the WETH lending rate tripled, and stablecoin deposit yields surged above 10%, causing a dramatic shift in market liquidity conditions.

• Aave Horizon is expanding the boundaries of on-chain lending, no longer limited to native crypto collateral. Users can now borrow stablecoins backed by real-world asset (RWA) tokens issued by institutions like Superstate, VanEck, Ripple, and others.

Introduction

The lending market is a core pillar of on-chain finance, providing liquidity for borrowers and enabling depositors to earn returns on idle assets. Lending protocols like Aave have moved beyond the early DeFi reliance on liquidity mining incentives, shifting toward sustainable models driven by stablecoin growth, high-quality collateral, and risk management systems. However, in April 2026, this market faced its most severe stress test to date.

The rsETH vulnerability event at KelpDAO triggered a chain reaction, impacting Aave’s WETH and stablecoin markets, leading to on-chain “bank runs,” with the utilization rate of major liquidity pools reaching 100%.

While this risk originated entirely from external cross-chain bridge infrastructure, it highlighted the systemic advantages and disadvantages of composability, collateral selection, and the lending mode of liquidity pools. Meanwhile, the transparency of on-chain data allows observers to directly monitor real-time changes in liquidity, interest rates, and user behavior.

This article will analyze the microstructure of Aave’s core lending markets, restore the real-time liquidity fluctuations during the KelpDAO event, and interpret the emerging value of Aave Horizon — promoting tokenized real-world assets as on-chain collateral for lending.

Liquidity and Interest Rate Changes During the KelpDAO Event

WETH Pool Drained Rapidly

Around 17:38 UTC on April 18, an attacker deposited unbacked rsETH into Aave as collateral and borrowed approximately 126k WETH in four transactions. Prior to the event, the utilization rate of the WETH pool (the ratio of borrowed assets to total deposited assets) was nearly 89%, leaving only 11% of liquidity buffer to withstand sudden risks.

Affected by the attack and a wave of depositors withdrawing en masse, the available liquidity (undeployed deposited assets) in this pool plummeted from about 350k ETH to nearly zero within two hours. Meanwhile, the utilization rate soared to 100% and remained high, with all ETH borrowed out, preventing subsequent users from withdrawing funds.

Source: Coin Metrics ATLAS

Interest Rate Fluctuations

Aave’s interest rate model automatically adjusts based on liquidity pressure. When utilization exceeds the optimal target (the inflection point), interest rates rise rapidly to curb new borrowing and attract more deposits.

Before the vulnerability event, the floating borrowing rate for WETH was about 2.3%, with an annualized deposit yield of approximately 1.9%, and the spread was small and stable, indicating healthy market operation. Aave set the utilization target for the WETH pool at 92%. When utilization hit 100%, the interest rate mechanism was triggered. The annualized borrowing rate surged to about 8.7%, and deposit yields increased to roughly 7.4%, widening the spread from 0.57% to 1.31%.

Source: Coin Metrics ATLAS, Talos Research

WETH is the largest lending asset on the Aave platform, with many users employing leverage strategies. These strategies are also core to many Ethereum vaults. Typically, users deposit liquid staking tokens (LSTs) or re-staked tokens (LRTs) (e.g., wstETH, rsETH) as collateral, borrow WETH, then repeatedly buy more staked assets to increase collateral and amplify staking yields. Recent research from Galaxy shows that Aave’s lending activity is highly concentrated on Ethereum-based collateral like liquid staking and re-staked tokens, with WETH being the primary borrowing target.

Before the event, the borrowing rate for WETH was about 2.3%, with staking yields around 4%, giving a positive spread of approximately 1.7% for leveraged strategies. After the rate spiked to 8.7%, the spread turned negative at -4.7%, causing leveraged positions to incur floating losses. Ultimately, rsETH and other re-staked tokens without full backing as collateral led to bad debt in the WETH pool.

Stablecoin Market Faces Bank Run

WETH is the most mainstream borrowing asset on Aave, while stablecoins constitute the largest liquidity base. The liquidity crisis in WETH quickly spread to stablecoin pools, causing a market-wide run.

Source: Coin Metrics ATLAS

Depositors withdrew en masse from stablecoin pools like USDT, USDC, USDe, pushing utilization rates to 100%. All available funds in these pools were drained. Within 24 hours, the combined stablecoin pools lost over $2 billion in liquidity. USDT withdrawals were fastest and largest, with liquidity shrinking by over 60% in about 1.2 hours; USDC’s withdrawals were more gradual, depleting all available liquidity in roughly 11.4 hours.

Source: Coin Metrics ATLAS, Talos Research

After utilization reached 100%, deposit yields—previously around 2-3%—shot up sharply. USDT and USDC yields rose to about 13%; DAI’s smaller pool saw liquidity exhausted first, with yields exceeding 24%; USDe experienced fluctuating yields due to large inflows and outflows.

Cross-Market Risk Transmission: Pool Mode vs. Isolation Mode

The KelpDAO event vividly exposed the risk characteristics of pool-based lending: a collateral crisis in one market can spread to others. The rsETH with insufficient backing initially pressured the WETH market, which then experienced collective liquidity withdrawals, further transmitting risk to the stablecoin sector.

Source: Coin Metrics ATLAS

The heatmap above shows the changes in utilization rates of major Aave v3 markets during the attack. Before the event, WETH and stablecoin pools already had high utilization (over 80%). After the risk materialized, these pools were pushed into the 90–100% high utilization zone and remained there, while governance token markets were largely unaffected.

This highlights the pros and cons of the pool-based lending model: shared liquidity improves capital efficiency and protocol composability but also allows risks in a single market to propagate throughout the system. In contrast, protocols like Morpho adopt an isolated lending model, with more dispersed liquidity and asset selection managed by operators, reducing risk spillover. During this event, about 86% of circulating rsETH was deposited in Aave, and the over-concentration of collateral amplified the impact.

Post-Event Market Overview

In the days following the attack, interest rates gradually stabilized at new equilibrium levels, and market liquidity began to recover. The total deposits in Aave v3’s core markets on Ethereum fell from $34.5 billion to $18.8 billion, while the outstanding loans decreased from $13.8 billion to $7.9 billion. Funds across stablecoins, Ethereum derivatives, and Bitcoin-related markets also declined, indicating a broad market confidence hit rather than issues with specific assets.

Source: Coin Metrics ATLAS, Talos Research

As of May 2026, the market continued to recover. WETH liquidity rebounded to about $620 million, with utilization rates of WETH, USDT, and USDC stabilizing between 80% and 90%. The $123 million bad debt from this incident was managed through a community-led DeFi United initiative, which raised over $300 million to provide risk backstops across Aave’s markets.

Aave Horizon: Moving Toward RWA Collateral Lending

Beyond the core markets, Aave is exploring new directions. As more real-world assets (RWA) are tokenized, the Horizon segment demonstrates the evolving trend in lending markets: collateral is no longer limited to native crypto assets, and on-chain credit is beginning to institutionalize. Aave Horizon is a dedicated platform for institutions and qualified participants, allowing users to use tokenized real-world assets (such as tokenized money market funds, U.S. Treasuries) as collateral to borrow stablecoins.

Horizon primarily serves two user groups: qualified institutional investors can deposit real-world assets as collateral and borrow stablecoins; ordinary users can deposit stablecoins without permission and earn the interest paid by institutional borrowers. This expands the utility of tokenized assets on-chain — assets do not need to be sold or simply held idle but can be used as collateral to generate liquidity around the clock.

Source: Aave Horizon Documentation

Eligible collateral includes stablecoins issued by Ripple (RLUSD), crypto arbitrage funds under Superstate (USCC), short-term government bond funds (USTB), as well as products from Janus Henderson (JAAA) and VanEck (VBILL). Launched in August 2025, Aave Horizon has surpassed $510 million in deposits and $172 million in total loans, ranking among the leading on-chain RWA lending platforms.

Source: Talos Research

Currently, stablecoins like RLUSD and Aave’s GHO remain the main assets for Horizon lending, but tokenized short-term government bonds and money market funds are steadily increasing in deposit volume, laying the foundation for RWA to play a larger role in on-chain credit markets.