Aegospotami was such a terrible blow because the Athenian navy was almost completely obliterated by the Spartan navy (under the command of Spartan navarch Lysander). The reason this was so important is because Athens needed their navy in order to maintain control over their 'Attican' Empire in the Mediterranean and effectively conduct their war effort. With the Athenian navy destroyed, Sparta had an open path to victory in the broader conflict.