Whale activity amplified the turmoil, highlighted by substantial wallet exits from Aave including the large Justin Sun withdrawal, fueling broader market concern.

With 100% utilization, borrowing rates are expected to spike as the protocol’s interest-rate curve penalizes high utilization.

Aave stated the impact was contained to the V3 ETH market, with V4 unaffected, and outlined precautions: freezing the rsETH reserve, removing its borrowing power, and temporarily resetting ETH loan-to-value to zero.

Mass withdrawals led ETH utilization on Aave to hit 100%, effectively locking remaining depositors from withdrawals and creating a liquidity crunch.

The outflows coincided with a spike in AAVE selling and the 100% ETH utilization, signaling that available liquidity was being exhausted amid panic.

Aave’s native token price dropped sharply, down about 20% on the day, as rsETH exploits and whale withdrawals pressured the market.

Ensuing selling pressure drove AAVE down more than 18%, with notable whale liquidations contributing to the downward momentum.

Aave faced significant stress as roughly $5.4 billion in ETH exited the protocol amid the AAVE sell-off and the rsETH-related incident linked to Kelp DAO, with Justin Sun alone withdrawing 65,584 ETH (about $154 million).

Aave reported that other assets and stablecoins remained normal and unaffected, indicating the impact was concentrated in ETH and rsETH-related exposures.

The incident centered on rsETH’s link to Kelp DAO’s liquid restaking product, prompting traders to monitor wallet movements and reassess exposure to Aave and its governance token.

Depositors are watching whether Aave’s Umbrella backstop and the rsETH market freeze can stabilize confidence and liquidity during the crisis.

Lookonchain linked the rsETH exploit to creating bad debt on Aave, as an attacker deposited rsETH to drain ETH, raising concerns about hidden leverage and liquidity risk.