Curve Founder Michael Egorov: Aave Needs to Address KelpDAO Bad Debt, Non-Isolated Lending Model Carries Higher Risks
Michael Egorov, founder of Curve Finance, expressed the need for Aave to properly handle the bad debt issue arising from the Kelp DAO attack. This incident resulted in approximately $292 million in losses, primarily due to rsETH being used as collateral to borrow ETH under a non-isolated lending model.
Egorov pointed out that while the non-isolated model offers strong scalability, it carries higher risks, making risk management crucial. He suggested referring to Curve Finance's fully isolated model or implementing a hybrid model; he believes that Aave v4's hub-and-spoke model is a step towards a semi-isolated and safer direction.
Source: Public Information
ABAB AI Insight
Egorov's statement directly addresses the core trade-offs in asset isolation design within DeFi lending protocols. The non-isolated model allows cross-asset liquidity pool sharing, enhancing capital efficiency and user convenience, but it also allows a single vulnerability or bad debt event to quickly propagate through the entire protocol's reserves; the fully isolated model, on the other hand, separates each type of collateral into independent pools, limiting risk spillover but sacrificing portfolio efficiency and lending depth. The hybrid model attempts to find a compromise, with Aave v4's hub-and-spoke architecture providing shared credit through a central hub while setting independent parameters for spokes, seeking balance within this spectrum.
This discussion corresponds to the risk pricing mechanisms in the long-term structural evolution of DeFi. Historically, protocol expansion has often been accompanied by the accumulation of bad debts; Curve itself faced similar liquidity and liquidation pressures due to the founder's large CRV collateral position. The current Kelp rsETH incident once again exposes the vulnerabilities of cross-chain re-staked assets in a high-leverage environment, prompting platforms to shift from relying on post-event security modules to preemptive isolation designs, strengthening incentive mechanisms towards sustainable risk management rather than mere scale growth.
From a global finance and wealth distribution perspective, this model's controversy accelerates the reallocation of capital within DeFi. Non-isolated designs have previously driven rapid TVL expansion and yield competition but have amplified the range of loss bearers in extreme events; transitioning towards semi-isolated or fully isolated models will reduce the probability of systemic shocks while affecting the pricing power and liquidity premiums of different asset classes. In the long run, it reflects the interaction between technological substitution and institutional constraints: protocols need to dynamically adjust between efficiency and safety to maintain participants' trust in the underlying mechanisms, rather than relying on ad-hoc responses after a single event.