Restarting the buyback is not that easy; prioritizing repaying external debts is essential.

Written by: DeFi Researcher Chado

Translated by: Azuma (@azuma_eth), Planet Daily

Editor's Note: The core content of this article is based on DeFi researcher Chado's research on "When will AAVE restart its buyback?" Odaily Planet Daily has added certain background and details based on this.

Recently, the altcoin market has shown signs of recovery, and AAVE has also received considerable attention. However, since the Kelp DAO hack in April (see "DeFi is hacked again for $292 million, is Aave safe now?"; "The final fix has been released, is Aave's bad debt issue finally coming to an end?"), Aave's token buyback has been suspended for several months, leading to ongoing disagreements in the market about AAVE's current value capture ability.

With UNI expanding its buyback scale due to the success of the Robinhood Chain ecosystem and pushing the price higher, AAVE holders are becoming increasingly concerned about the status of AAVE's buyback restart. However, according to author Chado, it is not so easy for AAVE to reactivate the buyback in the short term.

The following is Chado's research content, supplemented by Odaily Planet Daily.

Why has the buyback not returned?

To understand why AAVE's buyback has not yet restarted, we must first return to the rsETH incident that occurred on April 18.

On that day, Kelp DAO's LayerZero bridging route was attacked, and a large amount of rsETH, which was not supported by sufficient ETH, was minted and flowed into multiple on-chain markets. The attacker then used this rsETH as collateral in Aave and borrowed a large amount of WETH.

Aave quickly froze the markets related to rsETH and wrsETH and took measures to limit the spread of risk. However, since the attacker had already completed the collateral borrowing, the losses of the assets would not automatically disappear with the market freeze. According to subsequent disclosures from Aave, at one point, 152,577 rsETH were stolen from the LayerZero locked position, which, based on the reference ratio of 1.0696 rsETH corresponding to 1 ETH at the time, corresponds to a gap of about 163,183 ETH.

Afterward, Kelp froze and retrieved about 40,373 rsETH, corresponding to about 43,168 ETH; the Arbitrum Security Council froze 30,766 ETH held by the attacker; the liquidation of the attacker's positions in Aave and Compound is expected to recover up to approximately 12,323 WETH and 1,845 WETH, respectively. In total, these four parts amount to about 87,955 ETH, reducing the gap from over 160,000 ETH to about 75,000 ETH.

The remaining question is, who will fill this gap?

How much has Aave lost? How much more needs to be repaid?

In late April, Aave DAO, in collaboration with EtherFi, Lido, Ethena, Mantle, and others, launched a restoration plan called DeFi United.

The plan ultimately formed a rather complex funding structure. First, ecosystem participants such as EtherFi, Lido, Ethena, Ink, BGD, and Stani (the founder of Aave) collectively provided about 14,570 ETH, which is a donation that does not need to be repaid by Aave. Aave DAO itself directly contributed 25,000 ETH, which is particularly noteworthy — although it is neither a loan nor funds that need to be repaid in the future, it is money taken directly from the DAO treasury to cover the losses. In other words, this 25,000 ETH has already genuinely disappeared from Aave's balance sheet.

The remaining part is resolved through borrowing, with the largest loan coming from Mantle, with a maximum scale of 30,000 ETH. According to the relevant plan, Mantle provides a credit line of up to 36 months, with an interest rate of Lido's staking yield plus 1%.

In addition, Aave also requires about 44,787 ETH in short-term bridge funding to allow frozen or pending liquidation assets to enter the recovery process first.

Thus, the accounts become clearer. The gap is approximately 75,200 ETH, and the funds used to fill this gap include 14,570 ETH in donations, 25,000 ETH from the Aave treasury, a maximum of 30,000 ETH in long-term loans from Mantle, and about 44,787 ETH in short-term bridge loans — at first glance, these numbers even add up to more than the initial gap, but the reason is that part of the funding is only temporarily used for bridging.

Removing the short-term bridge loan, the most direct impact of the incident on Aave's balance sheet is the 25,000 ETH that has already been spent, along with the 30,000 ETH long-term loan from Mantle that will put pressure on future cash flows.

How long will it take to repay with current income?

So what does this have to do with restarting AAVE's buyback? The answer lies in Aave's income.

Chado analyzed data for the 144 days following the incident. From April 29 to the publication of his research, the total fees generated by the Aave protocol reached approximately $181.2 million, but the actual retained revenue for Aave DAO was only about $24 million, averaging about $167,000 per day.

More notably, Aave's current level of income has clearly decreased compared to before the incident. In the preceding similarly lengthy 144-day period, Aave DAO retained income was about $40.5 million. This means that revenue for the 144 days following the incident has decreased by about 41% compared to before.

Next, let's look at the long-term loan from Mantle. Calculating based on the maximum of 30,000 ETH, and using Chado's statistics when ETH was approximately $2,639, this loan corresponds to about $79 million.

If we simply calculate based on the revenue rate of the past 144 days, Aave can retain about $167,000 per day, so repaying $79 million would take about 473 days, which is over a year and three months.

Of course, this does not mean Aave is determined to use all future revenue for the next 473 days to repay Mantle, nor does it mean the buyback must wait until after 473 days to resume. This is a relatively extreme static stress test — assuming future income maintains the current level, and the DAO uses all retained income to repay this $30,000 ETH long-term financing, it would theoretically take about 473 days to pay off.

In fact, Chado conducted similar calculations in April of this year, when Aave DAO's daily income was about $266,000, and it was expected to take about 10 months to repay a loan of the same scale. However, with the recent decline in revenue, the repayment period has extended to about 15.6 months.

This also explains why the buyback has not returned: Aave does have income right now, but the income is unlikely to prioritize flowing to AAVE before the balance sheet is repaired.

Restarting the buyback is not that simple

Therefore, the real issue AAVE currently faces is when the income captured by the protocol can once again become "free cash flow" to feed back to the token level.

After the rsETH incident, Aave has already used 25,000 ETH from its treasury to fill part of the gap, while also bearing up to 30,000 ETH in long-term financing. As long as this account is not fully resolved, Aave DAO will find it difficult to continue distributing protocol income to AAVE holders as it did before.

This also means that the next round of "bull return" for AAVE depends not only on the DeFi market itself, but also on two variables — whether protocol income can restart growing and whether the balance sheet can gradually recover.

After all, only when the money earned by the protocol no longer needs to be prioritized to fill the gaps can AAVE's income capture logic truly start moving again.