The Biggest DeFi Black Swan of 2026 - AAVE's 200 Million Bad Debt: Risk or Opportunity?

On Saturday, the biggest DeFi black swan event of 2026 occurred.

Kelp DAO, which is an Ethereum re-staking protocol, was exploited by hackers who forged 116k rETH (worth $292 million), then used this Ethereum to borrow real ETH on lending platforms AAVE, COMP, and EUL. Since AAVE is the largest platform, the estimated bad debt is around $116k to $200 million. Many say AAVE is doomed, but I tell you, the greatest risks often present the biggest opportunities!

As the incident unfolded, many users withdrew their Ethereum from AAVE, for example, Sun withdrew 65k ETH ( worth $154 million ). In just these two days, AAVE’s TVL dropped from 26 billion to 17 billion, based on data from the 19th. Currently, the TVL has decreased by nearly 9 billion, and panic is still spreading. AAVE’s token price has fallen from 115 to a low of 84, a drop of 24%.

Currently, AAVE’s official has frozen the WETH reserves, and the solution has not yet been fully announced.

Many people are saying AAVE might be finished, possibly repeating the path of CETUS. But these two events are not even in the same league.

Back then, CETUS was hacked for 230 million, and the project is now essentially worthless. At the time of the hack, its market cap was 65k, now only 20 million dollars.

On the day of the hack, CETUS’s TVL plummeted 85%, from a high of 200 million to 35 million (meaning the main pool was basically drained, liquidity almost zero). We previously calculated that CETUS’s protocol revenue based on trading volume was about 28 million per year, so this hack amount is equivalent to 10 years of project earnings.

With the hacker incident and the massive outflow of TVL, it could take over a decade for the project to recover its earnings, which is the biggest blow to confidence. The project team can’t be enslaved for ten-plus years to work for users for free.

Now, let’s look at AAVE’s situation. Currently, TVL has dropped about 32%, with a loss of 200 million, accounting for 1% of the entire pool. In previous articles, we calculated that AAVE’s protocol annual revenue is around 800-900 million, with net profits of about 100 million. So even if the protocol had to cover all losses, it would be like enslaving itself for another 2 years. Therefore, in terms of scale, this incident is nowhere near CETUS.

AAVE has a bad debt handling mechanism called Umbrella, which is AAVE’s security module. In case of significant losses, it has a layered bad debt absorption system.

The first layer is the DAO layer—treasury absorption. Each asset has a small buffer funded by the DAO (for example, USDT has a buffer of 100k USDT), but this portion is relatively small and does not involve user assets.

The second layer is the insurance vault for individual pools—Umbrella Vault. Each asset has its own vault. Risky users deposit assets to earn high yields but also bear risks. This is currently AAVE’s main compensation layer. The estimated payout for WETH here is around 50 million, still not enough to cover all losses.

The third layer is the ordinary depositors themselves, who will see their exchange rates decrease proportionally, meaning they can only partially withdraw or wait until the pool is re-injected with new liquidity.

Although the Umbrella official documentation clearly states that Umbrella stakers bear the reduction responsibility (the second layer), it does not explicitly specify that ordinary depositors must bear the losses themselves. This is only the underlying protocol mechanism, as users enjoy yields but also accept pool-level risks.

Of course, the official has not yet clarified this, but I think they probably won’t make users bear these losses, as that would ruin the trust in the bank and make future cooperation difficult.

It’s like a bank being robbed of 200 million, and then saying that the loss is borne by ordinary users—that would cause a huge uproar. Who would dare to deposit money in that bank again?

So I believe the protocol will likely compensate this part, roughly 120-150 million, meaning the protocol would have to be prepared to serve as a black slave for about 1 to 1.5 years. But it’s not a big problem.

If the official later announces compensation, it would be a huge positive. Although the price has dropped 25%, confidence will eventually recover. Plus, AAVE has finally become an industry leader, so it probably won’t give up.

In fact, AAVE has never experienced a direct hacker attack before. There have been liquidity crashes and small bad debts, but this is the biggest challenge. It also proves that the risk isolation mechanism is relatively effective.

Finally, AAVE is unlikely to fail. Even with such a large TVL drop, it remains the largest lending protocol, so risk equals opportunity.