The exploit case involving KelpDAO has once again raised concerns. As reported, $292 million loss from KelpDAO led to a total value locked (TVL) decline in the DeFi sector of up to $13 billion.
Without examining the data closely, this figure is certainly alarming. However, the decline is not entirely due to funds lost from the exploit that occurred in the middle of April. Instead, it largely stems from financial structures that had previously been artificially inflated.
Leverage and looping within the DeFi system also amplified the impact of the decline. In the DeFi ecosystem, assets like rsETH are widely used as collateral in protocols such as Aave. Looping strategies are commonly applied in this system.
This looping mechanism works by depositing assets as collateral to borrow other assets, which are then used again for further deposits. This process can be repeated multiple times, allowing a single asset to be counted repeatedly in TVL. The problem arises when disruptions like exploits occur, as the relatively fragile structure of DeFi systems can trigger a domino effect that amplifies the decline.
The exploit that occurred in mid-April is not the first in DeFi. Previously, the industry has faced major crises such as the collapse of Terra, as well as significant hacks involving Wormhole and Ronin. Therefore, the narrative that DeFi is “dead” is not new. Despite having a significant impact, DeFi has continued to survive and evolve, indicating that the system has greater resilience than often assumed.
Rather than viewing this incident as the beginning of DeFi’s collapse, analysts see the decline as a repricing process or a reassessment of risk. Although there were significant outflows from Aave, this does not fully indicate that funds are leaving DeFi entirely. Much of the capital has instead rotated into other protocols such as Spark, which are considered safer.
This phenomenon shows that investors are not abandoning DeFi after the exploit, but are becoming more selective in choosing platforms. The exploit serves as a reminder that the ecosystem is still evolving and adapting. Increased awareness of risk within DeFi may lead to the development of systems that are safer, more transparent, and more efficient.
This phenomenon shows that investors are not abandoning DeFi after the exploit, but are becoming more selective in choosing platforms. The exploit serves as a reminder that the ecosystem is still evolving and adapting. Increased awareness of risk within DeFi may lead to the development of systems that are safer, more transparent, and more efficient.
