The DeFi sector had a potential $8 billion risk, but only $100 million has been exposed so far.

Fund managers, a role once trusted yet now demystified in the stock market, carried the wealth dreams of countless retail investors during the A-share boom. Initially, everyone idolized fund managers with prestigious university degrees and impressive resumes, believing that funds were less risky and more professional than direct stock trading. However, when the market declined, investors realized that so-called "professionalism" could not counter systemic risk. Worse still, these managers received management fees and performance bonuses; profits were attributed to their own abilities, but losses were attributed to investors. Now, with the role of "fund manager" appearing on the blockchain under the new name of "Curator" (external manager), the situation has become even more dangerous. They do not need to pass any qualification exams, undergo any regulatory scrutiny, or even disclose their true identities. Simply by creating a "vault" on a DeFi protocol and using ridiculously high annualized returns as bait, hundreds of millions of dollars could be attracted. Where this money went and what it was used for was completely unknown to investors. $93 million vanished. On November 3, 2025, when Stream Finance suddenly announced the suspension of all deposits and withdrawals, a storm sweeping the DeFi world reached its climax. The following day, an official statement was released: an external fund manager was liquidated during the market volatility on October 11, resulting in a loss of approximately $93 million in fund assets. The price of Stream's internal stablecoin, xUSD, plummeted, crashing from $1 to a low of $0.43 in just a few hours. This storm didn't come out of nowhere. As early as 172 days ago, Schlag, a core developer of Yearn, warned the Stream team. At the eye of the storm, he was even more blunt: "Just one conversation with them, and five minutes of browsing their Debank, is enough to realize this is going to end badly." [Image of a conversation between Yearn Finance and Stream Finance] Stream Finance is essentially a yield aggregator DeFi protocol that allows users to deposit funds into vaults managed by so-called Curators to earn yields. The protocol claimed it would diversify its investments across various on-chain and off-chain strategies to generate returns. This collapse was caused by two main reasons: First, an external Curator used user funds for opaque off-chain transactions, and its positions were liquidated on October 11th. Second, on-chain analysts further discovered that Stream Finance also leveraged a small amount of real capital several times through recursive lending with the Elixir protocol's deUSD. This "one foot in the air, the other in the sky" approach, while not the direct cause of the losses, greatly amplified the protocol's systemic risk and laid the groundwork for the subsequent chain reaction of collapses. These two issues combined to cause a catastrophic chain reaction: $160 million in user funds were frozen, the entire ecosystem faced $285 million in systemic risk, the Euler protocol generated $137 million in bad debt, and 65% of Elixir's deUSD was backed by Stream assets, with $68 million hanging on the brink of collapse. So, what exactly is this "Curator" model, which seasoned developers can easily see through yet still attracted over $8 billion in funding? And how did it gradually push DeFi to this systemic crisis? The Fatal Deformation of DeFi To understand the root of this crisis, we must return to the origins of DeFi. Traditional DeFi protocols, such as Aave and Compound, are fundamentally driven by the principle of "Code is law." Every deposit and loan adheres to rules written in smart contracts, ensuring transparency and immutability. Users deposit funds into a public pool, while borrowers must provide substantial collateral to lend money. The entire process is algorithm-driven, without human intervention. Risks are systemic and calculable, including smart contract vulnerabilities and liquidation risks under extreme market conditions, but not the subjective risk of a single "fund manager." However, in this new era, next-generation DeFi protocols, such as Morpho and Euler, have adopted a novel approach to fund management in pursuit of higher returns. They argue that Aave's public pool model is inefficient, leaving large amounts of capital idle and failing to maximize returns. Therefore, they introduced the Curator model. Users no longer deposit their money into a single pool, but instead choose individual "vaults" managed by Curators. Users deposit money into these vaults, and the Curator is fully responsible for how to invest and generate interest on that money. This model has expanded at an astonishing rate. According to DeFiLlama data, as of now, the total value locked in the Morpho and Euler protocols alone has exceeded $8 billion, with Morpho V1 reaching $7.3 billion and Euler V2 reaching $1.1 billion. This means that over $8 billion in real money is being managed by a large number of Curators from diverse backgrounds. This sounds wonderful; professionals are doing what they do best, and users can easily obtain higher returns than Aave. But beneath this "on-chain wealth management" facade, its core is actually very similar to P2P lending. The core risk of P2P lending in the past was that ordinary users, as investors, could not judge the true creditworthiness and repayment ability of the borrowers on the other end; the high interest rates promised by the platform concealed unfathomable default risks. The Curator model perfectly replicates this; the protocol itself is merely a matching platform. Users' money appears to be invested in professional Curators, but in reality, it's being invested in a black box. For example, on Morpho's website, users can see various vaults set up by different Curators, each boasting an attractive APY (Annualized Yield) and a brief strategy description. Users can deposit their USDC and other assets simply by clicking "Deposit." However, this is precisely where the problem lies. Aside from the vague strategy description and constantly fluctuating historical return rates, users often know nothing about the vault's internal operations. The core information regarding the vault's risks is hidden in an inconspicuous "Risk" page. Even if a user clicks on this page, they can only see the vault's specific holdings. Core information that determines asset security, such as leverage ratio and risk exposure, is nowhere to be found.

Morpho CEO Paul Frambot once said, "Aave is a bank, and Morpho is the infrastructure of a bank." But the subtext of this statement is that they only provide the tools, while the real "banking business," namely risk management and capital allocation, is outsourced to these Curators.

The so-called "decentralization" is limited to the moment of deposit and withdrawal, while the most important risk management aspect is entirely in the hands of an unknown and unregulated "manager."

It can be said that "decentralized money transfer, centralized money management."

The reason why traditional DeFi protocols are relatively secure is precisely because they minimize the variable of "human" intervention.

The Curator model of DeFi protocols, however, brings the biggest and most unpredictable risk—the "human element"—back onto the blockchain. When trust replaces code, and transparency becomes a black box, the cornerstone of DeFi security collapses. When "curators" collude with the protocol, the Curator model merely opens Pandora's box, while the tacit collusion between the protocol and the Curator completely unleashes the demons within. Curators typically profit by charging management fees and performance-based commissions. This means they have a strong incentive to pursue high-risk, high-return strategies. Since the principal belongs to the users, they bear no responsibility for losses, but they receive a large share of the profits if they win. This incentive mechanism of "internalizing returns and externalizing risks" is almost tailor-made for moral hazard. As DeFiance Capital founder Arthur criticized, in this model, Curators operate on the mindset: "If I mess up, it's your money. If I do well, it's my money." Even more alarming is that instead of acting as regulators, protocol providers become accomplices in this dangerous game. To attract TVL (Total Value Locked) in a fiercely competitive market, protocols need to offer astonishingly high APY (Annualized Yield) to attract users. These high APYs are created by Curators employing aggressive strategies. Therefore, protocol providers not only turn a blind eye to Curators' risky behavior but also actively collude with or encourage them to establish high-interest vaults as a marketing gimmick. Stream Finance is a prime example of this opaque operation. According to on-chain data analysis, Stream claims to have a total value locked (TVL) of up to $500 million, but according to DeFillama data, Stream's TVL peaked at only $200 million. This means that over three-fifths of user funds flowed into unknown off-chain strategies, operated by some mysterious proprietary traders, completely deviating from the transparency that DeFi should possess. The statement released by the well-known Curator organization RE7 Labs after the Stream Finance collapse blatantly exposed this entanglement of interests. They admitted that before listing Stream's stablecoin xUSD, they had identified its "centralized counterparty risk" through due diligence. However, due to "significant user and network demand," they still decided to list the asset and set up a separate lending pool for it. In other words, for the sake of traffic and popularity, they chose to dance with risk. When protocols themselves become advocates and beneficiaries of high-risk strategies, the so-called risk assessment becomes meaningless. Users no longer see genuine risk warnings, but rather a meticulously planned marketing scam. They are led to believe that the high APYs (Average Returns) in double or triple digits are the magic of DeFi, unaware that behind them lies a trap leading to the abyss. The Domino Effect: On October 11, 2025, the cryptocurrency market experienced a bloodbath. In just 24 hours, nearly $20 billion was liquidated across the network. The liquidity crisis and deep losses resulting from this liquidation are emerging from DeFi. Analysis on Twitter generally suggests that many DeFi protocol curators, in pursuit of higher returns, tend to employ a high-risk off-chain strategy: "selling volatility." This strategy essentially bets on market stability; as long as the market remains calm, they can continuously generate revenue through fees. However, once the market experiences significant volatility, they are prone to losing everything. The market crash of October 11th became the trigger for this massive collapse. Stream Finance was the first major domino to fall in this disaster. Although the official sources haven't disclosed the specific strategies employed by the curators that caused the losses, market analysis generally points to high-risk derivatives trading similar to "selling volatility." However, this was only the beginning of the disaster. Because Stream Finance's tokens, such as xUSD and xBTC, were widely used as collateral and assets in DeFi protocols, its collapse quickly triggered a chain reaction affecting the entire industry. According to preliminary analysis by DeFi research firm Yields and More, Stream's direct debt exposure reached $285 million, revealing a massive risk contagion network: the biggest victim was the Elixir protocol. As one of Stream's major lenders, Elixir lent it a staggering $68 million in USDC, representing 65% of Elixir's total reserves of its stablecoin, deUSD. RE7 Labs, a former partner, has also become a victim. Its vaults on multiple lending protocols face millions of dollars in bad debt risk because they accepted xUSD and Elixir-related assets as collateral. The wider contagion unfolded through a complex "double-collateralization" path. Stream's tokens were collateralized in mainstream lending protocols such as Euler, Silo, and Morpho, which in turn were nested within other protocols. The collapse of one node, through this spiderweb-like financial network, rapidly propagated throughout the entire system. The hidden risks planted by the October 11 liquidation event extend far beyond Stream Finance. As Yields and More warned, "This risk map is still incomplete, and we expect more affected liquidity pools and protocols to be exposed." Another protocol, Stables Labs, and its stablecoin USDX, have recently experienced a similar situation, drawing criticism from the community. Problems with protocols like Stream Finance expose the fatal flaws of this new Ce-DeFi (Centralized Decentralized Finance) model: When protocols lack transparency and power is excessively concentrated in the hands of a few, user fund security depends entirely on the business ethics of the fund managers, which is extremely risky without regulatory and rule constraints. From Aave's transparent on-chain bank to Stream Finance's asset management black box, DeFi has undergone a fatal evolution in just a few years. When the ideal of "decentralization" is distorted into a frenzy of "deregulation," using the narrative of "professional management" to cover up the opaque reality of fund operations, what we get is not better finance, but a worse banking industry. The most profound lesson of this crisis is that we must re-examine the core value of DeFi: transparency is far more important than the decentralized label itself. An opaque decentralized system is far more dangerous than a regulated centralized system. This is because it lacks both the credibility and legal constraints of a centralized institution and the transparency and censorship resistance that a decentralized system should possess. Bitwise's Chief Investment Officer, Matt Hougan, famously said to all investors in the crypto world, "There is no such thing as a risk-free double-digit return." For every investor attracted by high APYs, before clicking the "deposit" button again, they should ask themselves this question: Do you really understand where the returns on this investment come from? If you don't, then you are the returns.