Aave, a leading DeFi lending platform, has incurred over $200 million in bad debt following an exploit involving KelpDAO. Attackers minted 116,500 unbacked rsETH and used it as collateral to borrow high-quality assets, severely impacting Aave's liquidity. This exploit led to a rapid withdrawal of funds, with Aave's deposits plummeting from $45.6 billion to $29.2 billion, and its Total Value Locked (TVL) dropping to $15 billion. The liquidity crisis was exacerbated by the exploit's exposure of Aave's reliance on looping strategies, which concentrated risk rather than diversifying it. As a result, Aave's Umbrella module, designed to absorb bad debt, faced its first significant test but struggled to cover the losses fully. Meanwhile, investors shifted capital to Sparklend, which saw its TVL increase from $1.9 billion to $3.5 billion, as market participants sought safer alternatives with better risk controls.