DeFi lending protocols face five loss allocation models after bad debt triggers

When bad debt is triggered by liquidation, price oracle updates or governance votes, five common structures determine who absorbs the loss. In Morpho isolated markets, lenders immediately bear proportional loss at liquidation. In Aave v3 shared pools, aToken balances remain unchanged initially, with loss covered by Umbrella buffer and protocol reserves before any shortfall is allocated to remaining lenders. Morpho Vault V1.0 immediately adjusts share price upon bad debt recognition, while V1.1 defers loss to exiting users. V2 defers recognition until next interest calculation. The timing of loss recognition and the presence of absorption layers between loss occurrence and lenders determine the final distribution of liability.