• Aave's TVL dropped over 30% to $16.7 billion despite a broader crypto market recovery.
• The decline could be traced to Kelp DAO's recent $293 million exploit last week.
• Aave's governance disputes and contributor exits could amplify uncertainty, accelerating liquidity withdrawals across the protocol.

Decentralized finance (DeFi) protocol Aave has seen a sharp decline in activity, with its total value locked (TVL) falling 33% over the past week to roughly $16.7 billion, according to DeFiLlama data. 

The data shows that Aave's TVL dropped from $34 billion in January. The protocol's on-chain revenue also dropped from $1.1 million in early February to $625,000 on Monday.

The drop comes despite a broader recovery across crypto assets, with major tokens posting gains amid improving macro and geopolitical sentiment.

Kelp DAO incident triggers risk-off shift across DeFi

The decline is partly traced to last week's $293 million exploit involving Kelp DAO's rsETH token. Attackers exploited a vulnerability in a LayerZero V2 bridge between Unichain and Ethereum on Saturday, enabling the withdrawal of 116,500 rsETH without a corresponding burn on the source chain. 

The assets were subsequently used as collateral on Aave V3 deployments across Ethereum and Arbitrum, where borrowers opened positions against WETH and wstETH, according to a report by LlamaRisk.

In response, Aave's governance body quickly contained the risk. Measures included freezing rsETH and wrsETH reserves across multiple V3 markets, setting loan-to-value ratios to zero, adjusting WETH interest rates, and restricting borrowing activity in key pools.

LlamaRisk outlined potential bad-debt scenarios ranging from $123.7 million to $230.1 million, depending on how losses are distributed.

Aave's recent governance tensions have also contributed to the decline. Prolonged disputes over revenue allocation, fee structures, and the expanding role of Aave Labs have led to the exit of several major contributors, including BGD Labs, Chaos Labs, and the Aave Chan Initiative.

The impact has extended beyond Aave, affecting the wider DeFi market. Total value locked across protocols dropped by more than $7 billion within 48 hours to $85 billion.

Despite the decline in TVL, Aave's native token, AAVE, has shown relative resilience, rising 1.9% over the past 24 hours to trade at $91.

AAVE Technical Analysis: AAVE eyes $90 support

In the daily chart, AAVE trades at $91.22, maintaining a bearish near-term tone as price holds below the 20-, 50- and 100-period Exponential Moving Averages (EMAs), which now cluster as overhead supply. The Relative Strength Index (RSI) around 42 and a depressed Stochastic Oscillator (Stoch) near 15 suggest weak but stabilizing downside momentum, hinting that sellers remain in control while immediate recovery attempts are likely to face selling pressure into nearby resistance.

On the upside, initial resistance appears at the 20-period EMA near $98.80, followed by the 50-period EMA around $105.22 and the 100-period EMA near $121.46, ahead of a more distant horizontal barrier at roughly $132.12 and the major cap near $182.21. On the downside, immediate support is seen at the horizontal level around $90.47, with further demand expected near $77.11.

(The technical analysis of this story was written with the help of an AI tool.)