Kaaden was born in Pobershau, Saxony. His father worked as a chauffeur to the sales manager at the DKW factory, which from 1932 formed part of Auto Union AG. At eight years old, Kaaden attended the opening of the Nürburgring racing circuit, an event he later cited as the formative influence on his engineering ambitions.
He studied at the Technical Academy in Chemnitz. In 1940 he joined the Henschel aircraft factory at Berlin-Schönefeld, working under Herbert A. Wagner, designer of the Hs 293 radio-guided rocket-propelled missile. From 4 October 1943 he was based at the Peenemünde Army Research Center on the Hs 293 project. Contrary to various accounts, Kaaden did not work on the V-1 flying bomb or on the V-2 rocket programme under Wernher von Braun. When Allied bombing destroyed the Peenemünde facilities in August 1943, production and testing of the Hs 293 project moved to the Mittelwerk factory beneath the Harz mountains at the Dora-Mittelbau site, where Kaaden was captured by American forces at the war's end.
Kaaden returned to Zschopau after the war and established a timber business supplying roof trusses for bomb-damaged buildings. In his workshop he built his first racing motorcycle, based on the DKW RT 125, which he rode in local events.
The path to the IFA factory team at Zschopau opened indirectly. Independent East German engineer Daniel Zimmermann had developed heavily modified DKW RT 125 engines featuring rotary disc valves, asymmetric port timing, and increased primary compression. Zimmermann's team riders, Bernhard Petruschke and Diethart Henkel, consistently beat the government-backed IFA factory riders in the 1952 GDR 125 cc Championship. The East German government, uncomfortable with a state-sponsored team losing to privateers, pressured Zimmermann to share his engine's secrets with IFA. By March 1953, existing racing manager Kurt Kämpf had been moved aside and Walter Kaaden was installed as IFA's racing manager, with access to Zimmermann's designs. The 1953 IFA factory racer immediately adopted the rotary disc valve and other ZPH features, producing 13 bhp at around 100 bhp per litre.
Kaaden's most significant contribution was his systematic study of exhaust resonance in two-stroke engines. In 1955 he turned his attention to expansion chambers — a concept first explored by DKW designer Erich Wolf on 1951 racers. Using an oscilloscope to examine resonance behaviour in the exhaust system, Kaaden developed expansion chamber profiles that maximised power extraction. This approach, exploiting resonance waves to effectively supercharge the cylinder during the intake phase, proved transformative.
By 1961 his 125 cc race engine was producing approximately 25 bhp at 10,800 rpm, achieving an output of 200 bhp per litre — a milestone no engine of any configuration had previously reached. MZ machines took 13 Grand Prix victories and 105 podium finishes between 1955 and 1976. In 1961, factory rider Ernst Degner held a competitive position in the 125 cc world championship.
At the final round of the 1961 season in Sweden, Degner defected to West Germany, taking with him comprehensive knowledge of Kaaden's technical work. He subsequently joined Suzuki and in 1962 won the 50 cc world championship for them — the first world championship for a Japanese manufacturer. The two-stroke expertise Kaaden had developed at MZ under severe resource constraints was now the property of a well-funded Japanese factory operation. Japanese manufacturers rapidly adopted and developed expansion chamber technology across multiple displacement classes, and their two-stroke dominance through the 1960s and 1970s was built in significant part on Kaaden's foundational work. British author Mat Oxley documented the episode in his book Stealing Speed.
Kaaden continued to work at MZ through subsequent years but the stolen head start deprived him and the factory of the world championship recognition their engineering deserved. He died on 3 March 1996.