Author: Chaos Labs; Translator: @Jinse Finance xz
DeFi has entered a new structured phase: institutional trading strategies are being abstracted into composable tokenized assets.
This trend began with the rise of Liquidity Staking Tokens (LSTs), and Ethena Labs' tokenized basis trading became a key turning point for DeFi structured products. This protocol packages strategies as synthetic dollars by hedging Delta risk, transforming strategies requiring 24-hour margin management into one-click tokens, redefining users' expectations of DeFi.
Once exclusive to trading desks and institutions, yield products have now become mainstream—USDe has become the fastest-growing stablecoin to reach a total locked value of hundreds of billions of dollars. Ethena's success confirms the market's deep-seated demand for tokenized access to institutional strategies. This shift is reshaping the market structure and sparking a new wave of gold rush by "risk curators" or on-chain capital allocators (OCCAs)—who are packaging yield and risk strategies into a more streamlined user interface.
The industry has not yet reached a unified definition for Risk Curators or OCCAs. This label encompasses various designs, but their common core lies in the repackaging of yield-generating strategies.
OCCAs typically launch branded strategy products, while Risk Curators primarily utilize modular money markets such as Morpho and Euler Labs to generate returns through parametric vaults. The total value locked (TVL) of these two types of applications surged from less than $2 million in 2023 to $20 billion (an increase of approximately 10,000 times).
This raises a series of fundamental questions: Where are the deposits actually going? Under which agreements and counterparty risks are the funds exposed? Are the risk parameters adaptable? Can they effectively cope with real volatility events? What are the underlying assumptions? What is the liquidity of the underlying assets? If a concentrated redemption or run occurs, what are the exit paths? Where are the risks hidden? On October 10th, the largest altcoin crash in cryptocurrency history swept through CEXs and perpetual contract DEXs, triggering cross-market liquidations and automatic reductions (ADLs). However, Delta-neutral tokenized products seem to have been unaffected. These products mostly operate like black boxes, with almost no information disclosed except for the advertised annualized returns and broad market promises. A few OCCAs may at most indirectly disclose protocol risk exposure and strategy direction, but key information such as real-time data at the position level, hedging channels, margin buffers, dynamic asset backing, and stress marking strategies is rarely disclosed—and even when disclosed, it is often selective or delayed. Due to the lack of verifiable marking data or traces at the channel level, users find it difficult to determine whether their risk resistance stems from robust design, luck, or delayed financial recognition; in most cases, users are even unaware of whether actual losses have occurred. We will analyze four common design flaws: centralized control, asset re-collateralization, conflicts of interest, and limited transparency.
Most bundled revenue-generating "black boxes" are operated by multi-signature wallets controlled by external accounts (EOAs) or operators, responsible for the custody, transfer, and deployment of user funds. This centralized model shortens the path to catastrophic losses due to operational errors (such as key leaks or coerced signers). It also reproduces a common pattern of bridging attacks that dominated the industry in the previous cycle—even without malicious intent, a single compromised workstation, phishing link, or insider abusing emergency privileges can cause massive damage.
Some income-generating products exhibit the phenomenon of collateral being reused along a vault chain. One vault deposits funds into another vault or uses it as collateral for loans, which then circulates into a third vault. Investigations have documented circular lending patterns: deposits are "laundered" through multiple vaults, artificially inflating the total locked value, forming a recursive minting-lending (or borrowing-supply) chain, amplifying systemic risk.
Even if all participants act in good faith, setting optimal supply/borrowing caps, yield curves, or choosing the perfect oracle solution for a product is not easy. These decisions involve trade-offs: an overly large or unlimited market may exhaust exit liquidity, making liquidation unprofitable and inducing manipulation; conversely, too low caps will restrict healthy activity; a yield curve that ignores liquidity depth may put lenders in distress.
The problem becomes more pronounced when curators' performance is measured by growth—incentives for curators and depositors may diverge. The October market cleansing exposed a simple problem: users lack verifiable monitoring data on risk locations, tagging methods, and the real-time existence of asset backing. Due to risks such as upfront trading and short squeezes, real-time position disclosure is not always wise. However, a certain level of transparency is compatible with the business model: portfolio-level visibility (not transaction-by-transaction data), reserve composition disclosure, and hedging coverage by asset class can all be verified by third parties. These systems can also provide reserve verification and access governance without exposing sensitive transaction data through dashboards, custody balance certificates, and reconciliation reports of custody/locked positions and liabilities.The recent wave of curated products is pushing DeFi from its early core principles of non-custodial, verifiable, and transparent operations towards a more institutionalized operating model.
This shift itself is not inherently wrong. The maturity of DeFi has created space for structured strategies, which inevitably require a certain degree of operational discretion and centralized components.
However, accepting complexity does not equate to accepting opacity.
The goal is to bridge the gap with the spirit of DeFi by establishing a viable middle ground—one where operators can manage complex ledgers while maintaining transparency for users. To achieve this, the industry should move in the following directions: Proof of Reserves: Moving beyond the limitations of surface-level Annualized Yield (APY), disclosing details of underlying strategies, and introducing regular third-party audits and PoR systems. Users should be able to verify asset backing at any time. Modern Risk Management: Pricing and management solutions for structured yield products already exist and have been adopted by leading DeFi protocols such as Aave. The Chaos risk oracle optimizes protocol parameters by reducing centralized single points of failure, while maintaining the health and security of the money market. Reducing Centralization Risk: This is not a new problem. Bridging attacks have forced the industry to confront issues such as key upgrades, signer collusion, and opaque emergency permissions. We should not forget the lessons of history: adopt threshold signatures or hardware security modules (HSMs); implement key ownership separation; role separation (proposal, approval, execution); real-time fund allocation and minimum hot wallet balance; whitelisting of withdrawals through escrow paths; time-locked upgrade mechanisms with public queues; and strictly limited, revocable emergency permissions. Limiting Systemic Risk: Collateral reuse is an inherent characteristic of products such as insurance or re-staking. Re-collateralization should be restricted and mandatory disclosure required to prevent the formation of a circular minting-lending loop between related products. **Interest Alignment Transparency:** Incentives should be as transparent and open as possible. Clearly defining the curator's interests, related party networks, and change approval processes can transform a black box into a user-evaluable contract. **Standardization:** Risk curation is already a $20 billion industry. This segment needs to establish minimum standardized norms, including a unified classification system, mandatory disclosure requirements, and event tracking mechanisms. By implementing some commitments, the curation market can retain its professional structural advantages while protecting user rights through transparency and verifiable data. **5. Conclusion:** The rise of OCCA and risk curators is an inevitable result of DeFi entering the structured product stage. Since Ethena proved that institutional-grade strategies can be tokenized and distributed, the formation of a professional allocation layer around the money market has become inevitable. This layering itself is not the problem; the problem lies in the operational freedom required, which gradually replaces verifiability. The solution is clear: issue reserve certificates linked to liabilities, disclose incentives and related parties, restrict recollateralization, reduce single points of control through modern key management and change control, and incorporate risk signals (not just prices) into risk parameter management. Ultimately, success depends on being able to answer three key questions at any time: Is my deposit backed by assets? What protocol, venue, or counterparty risks am I exposed to? Who controls the assets? DeFi doesn't need to choose between complexity and fundamental principles. The two can coexist, and transparency can expand in tandem with complexity.
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