It is recommended to withdraw your wETH just to be safe. Here’s what happened, and why this severely impacted AAVE: the token price dropped, but it did not affect the price or break the peg of rsETH against ETH. You are Aave. A user comes to you and says: “I’ll deposit 100 rsETH as collateral. In exchange, lend me 80 WETH.” You agree. Now: In your “safe” (the Aave contract), you have +100 rsETH. You’ve lent the user -80 WETH. The user (or a hacker) takes that loan and disappears. Then the hack occurs: The hackers steal those 100 rsETH via the Kelp bridge (exploiting a vulnerability) and target those rsETH tokens. Those rsETH are no longer in your Aave safe—they’ve been moved to a wallet controlled by the hackers. Now the problem arises: The hacker still owes you 80 WETH. But you (Aave) no longer have the 100 rsETH to sell and recover your funds (to liquidate the collateral and reclaim your loan). Even though rsETH still holds value on the market (because it maintains its peg to ETH and can be bought/sold on Uniswap), those specific stolen tokens are no longer available to Aave. It’s like someone leaves you an gold watch as collateral for a loan… and then someone steals that gold watch you were holding as collateral. The gold watch still has market value—it hasn’t lost worth—but it’s useless to you because you no longer have it. The borrower doesn’t repay you, and you can’t sell the watch to recover your lent money because it’s gone. That’s why this is called “bad debt”: Aave lent real WETH, but the collateral vanished and cannot be easily recovered.