A potential $8 billion bomb in Decentralized Finance has now only been liquidated by 100 million.

Do you really understand where the returns from DeFi come from? If you don't understand, then you are the return.

Fund managers, a role that was once trusted and then demystified in the stock market, carried the wealth dreams of countless retail investors during the booming period of A-shares. At first, everyone was chasing after fund managers who graduated from prestigious universities and had impressive resumes, believing that funds were a less risky and more professional alternative to directly trading stocks.

However, when the market fell, investors realized that the so-called “professionals” could not defend against systemic risks. Worse still, they took management fees and performance bonuses, making profits from their own abilities while the losses were borne by the investors.

Nowadays, when the role of “fund manager” arrives on the chain under the new name “Curator” (external manager), the situation becomes even more dangerous.

They do not need to pass any qualification exams, do not need to undergo any regulatory agency review, and do not even need to disclose their true identity.

You only need to create a “vault” on a Decentralized Finance protocol, using an absurdly high annual yield as bait, to attract hundreds of millions of dollars in funds. But where does this money go, and what is it used for? Investors are completely unaware.

93 million dollars vanished

On November 3, 2025, when Stream Finance suddenly announced the suspension of all deposits and withdrawals, a storm sweeping through the Decentralized Finance world reached its climax.

The next day, the official statement was released: an external fund manager faced a liquidation during the severe market fluctuations on October 11, resulting in a loss of approximately 93 million dollars in fund assets. The price of Stream's internal stablecoin xUSD plummeted in response, crashing from 1 dollar to a low of 0.43 dollars in just a few hours.

The storm was not without warning. As far back as 172 days ago, Yearn's core developer Schlag had warned the Stream team. Right in the eye of the storm, he was quite blunt:

“Just having one conversation with them and spending 5 minutes browsing their Debank will make you realize that this will end badly.”

The conversation between Yearn Finance and Stream Finance

Stream Finance is essentially a yield aggregation DeFi protocol that allows users to deposit funds into a treasury managed by so-called Curators to earn yields. The protocol claims to diversify investments across various on-chain and off-chain strategies to generate returns.

The recent explosion was caused by two main reasons: First, external Curators used user funds for opaque off-chain transactions, and their positions were liquidated on October 11.

Secondly, on-chain analysts further discovered that Stream Finance also engaged in recursive lending with the deUSD of the Elixir protocol, leveraging several times with a small amount of real capital. This “left foot stepping on the right foot” model, while not the direct cause of the losses, significantly amplified the systemic risks of the protocol and set the stage for subsequent chain collapses.

These two issues together led to a catastrophic chain reaction: $160 million of user funds were frozen, the entire ecosystem faced $285 million in systemic risk, the Euler protocol generated $137 million in bad debts, while Elixir's deUSD is backed by 65% in Stream assets, with $68 million hanging on the brink of collapse.

So, what exactly is this “Curator” model that seasoned developers can see through at a glance, yet has still attracted over $8 billion in funding? How has it gradually pushed DeFi from the ideal of transparency and trustworthiness towards today's systemic crisis?

The Deadly Transformation of Decentralized Finance

To understand the roots of this crisis, we must return to the origins of Decentralized Finance.

Traditional DeFi protocols represented by Aave and Compound have their core appeal in “Code is law”. Every deposit and every loan must adhere to the rules written in the smart contracts, which are open, transparent, and immutable. Users deposit funds into a large public pool, while borrowers must provide over-collateralization to borrow funds.

The entire process is driven by algorithms, with no human manager intervention. The risks are systemic and quantifiable, such as smart contract vulnerabilities or liquidation risks in extreme market conditions, but they are definitely not the result of any individual “fund manager”'s human risk.

However, in this cycle, a new generation of DeFi protocols represented by Morpho and Euler has implemented a new type of capital management approach in pursuit of yield. They believe that Aave's public liquidity pool model is inefficient, with a large amount of capital being idle and unable to maximize returns.

Therefore, they introduced the Curator mode. Users no longer deposit money into a unified pool, but instead choose individual “Vaults” managed by the Curator. Users deposit money into the Vaults, and the Curator is fully responsible for how to invest and generate returns with this money.

The expansion speed of this model is astonishing. According to DeFiLlama data, as of now, the total locked value of just the two major protocols, Morpho and Euler, has exceeded 8 billion USD, with Morpho V1 reaching 7.3 billion USD and Euler V2 having 1.1 billion USD.

This means that over 8 billion dollars in real assets are being managed by a large number of curators from various backgrounds.

This sounds wonderful, professionals doing professional things, and users can easily achieve higher returns than Aave. But tearing away the glamorous exterior of “on-chain finance”, its core is actually quite similar to P2P.

The core risk of P2P in the past was that ordinary users as investors could not assess the true creditworthiness and repayment ability of borrowers on the other end. The high interest promised by the platform is backed by immeasurable default risk.

The Curator mode perfectly replicates this, as the protocol itself is merely a matching platform. Users' money appears to be invested in professional Curators, but in reality, it is invested in a black box.

Taking Morpho as an example, users can see various vaults set up by different Curators on its website, each boasting enticing APY (Annual Percentage Yield) and a brief strategy description.

For example, “Gauntlet” and “Steakhouse” on this chart are the Curators of the respective vaults.

Users only need to click deposit to put their USDC and other assets into it. But the problem lies precisely here: apart from the vague strategy description and the constantly fluctuating historical return rate, users often know nothing about the internal workings of the vault.

The core information regarding vault risks is hidden on an inconspicuous “Risk” page. However, even if users intentionally click on that page, they can only see the specific holdings of the vault. Key information that determines asset safety, such as leverage and risk exposure, is nowhere to be found.

The custodian of the vault hasn't even submitted a risk disclosure.

Inexperienced users find it difficult to assess the security of the underlying earning assets in the vault.

Paul Frambot, the CEO of Morpho, once said: “Aave is a bank, while Morpho is the infrastructure of the bank.” However, the underlying implication of this statement is that they only provide tools, while the real “banking business”, which includes risk management and capital allocation, is outsourced to these Curators.

The so-called “decentralization” is limited to the moment of deposits and withdrawals, while the most critical risk management aspects are completely in the hands of an unregulated “manager” whose background is unknown.

It can truly be said: “Decentralized Finance for funding, centrally managed money.”

The reason traditional DeFi protocols are relatively secure is that they maximize the exclusion of the variable of “human.” However, the Curator model of DeFi protocols brings back the greatest and most unpredictable risk of “human” into the blockchain. When trust replaces code and transparency turns into a black box, the cornerstone of DeFi security collapses.

When the “master” colludes with the protocol

The Curator mode has merely opened Pandora's box; the tacit collusion of interests between the protocol parties and the Curator has completely unleashed the demons inside.

Curators typically earn money by charging management fees and performance commissions. This means they have a strong incentive to pursue high-risk, high-return strategies. After all, the principal belongs to the users, so they are not responsible for losses; once they win, they can receive a large portion of the profit sharing.

This incentive mechanism of “internalizing profits and externalizing risks” is almost tailor-made for moral hazard. As criticized by Arthur, the founder of DeFiance Capital, under this model, the mindset of the Curators is: “If I mess up, it's your money. If I get it right, it's my money.”

What’s even scarier is that the protocol parties not only failed to play the role of regulators but instead became the “accomplices” in this dangerous game. In order to attract TVL (Total Value Locked) in the fierce market competition, protocol parties need to offer astonishingly high APY (Annual Percentage Yield) to attract users. And these high APYs are generated by those Curators who adopt aggressive strategies.

Therefore, the parties to the agreement not only turn a blind eye to the risky behavior of the Curator, but even actively collaborate with or encourage them to set up high-interest vaults as a marketing gimmick.

Stream Finance is a typical example of such opaque operations. According to on-chain data analysis, Stream claims to have a total value locked (TVL) of up to 500 million dollars, but according to DeFillama data, Stream's TVL peaked at only 200 million.

This means that more than three-fifths of user funds have flowed into unknown off-chain strategies operated by some mysterious proprietary traders, completely detached from the transparency that DeFi should have.

The statement released by the renowned Curator organization RE7 Labs after the Stream Finance explosion fully exposes this bundling of interests.

They acknowledged that before launching the stablecoin xUSD on Stream, they had already identified its “central counterparty risk” through due diligence. However, due to the “significant user and network demand,” they still decided to launch the asset and established a separate lending pool for it. In other words, for the sake of traffic and popularity, they chose to dance with risk.

When the protocol itself has become a proponent and beneficiary of high-risk strategies, the so-called risk assessment becomes a mere formality.

What users see is no longer a real risk warning, but a carefully orchestrated marketing scam. They are led to believe that those double-digit and triple-digit APYs are the magic of Decentralized Finance, yet they do not realize that behind this is a trap leading to the abyss.

The collapse of dominoes

On October 11, 2025, the cryptocurrency market experienced a bloodbath. In just 24 hours, the total liquidation amount across the network approached $20 billion, and the liquidity crisis and deep losses brought about by this clearing are emerging from Decentralized Finance.

Analysis on Twitter generally suggests that many DeFi protocols' Curators tend to adopt a high-risk strategy off-chain in pursuit of returns: “Selling Volatility.”

The essence of this strategy is to bet on market stability. As long as the market is calm, they can continue to charge fees and make profits. However, once the market experiences severe fluctuations, they can easily suffer devastating losses. The market crash on October 11 became the fuse that ignited this huge bomb.

Stream Finance was the first important domino to fall in this disaster. Although the official sources have not disclosed the specific strategies used by Curator that led to the losses, market analysis generally points to high-risk derivative trading similar to “selling volatility.”

However, this is just the beginning of the disaster. Due to the widespread use of Stream Finance's xUSD, xBTC, and other tokens as collateral and assets in Decentralized Finance protocols, its collapse quickly triggered a chain reaction that affected the entire industry.

According to preliminary analysis by the DeFi research institution Yields and More, the direct debt exposure related to Stream amounts to as much as $285 million, revealing a massive risk contagion network: the biggest victim is the Elixir protocol, which is one of the main lenders to Stream, having lent up to $68 million in USDC, accounting for 65% of Elixir's total reserves in the stablecoin deUSD.

RE7 Labs, a former collaborator, has now 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.

Wider contagion unfolds through complex “repeated collateralization” pathways, where the Stream tokens are collateralized in mainstream lending protocols like Euler, Silo, and Morpho, which are then nested layer upon layer by other protocols. The collapse of one node rapidly transmits through this spiderweb-like financial network to the entire system.

The hidden risks buried by the liquidation event on October 11 go far beyond just Stream Finance. As Yields and More warned: “This risk map is still incomplete, and we expect more affected liquidity pools and protocols to be revealed.”

Another protocol, Stables Labs, and its stablecoin USDX have recently faced similar issues and have been questioned by the community.

The issues exposed by protocols like Stream Finance reveal the fatal flaws of this new type of Ce-DeFi ( centralized management decentralized finance ) model:

When the transparency of a protocol is lacking and power is overly concentrated in the hands of a few, the security of users' funds entirely relies on the integrity of the fund managers, which poses a high risk in the absence of regulation and rules.

You are the one who profits.

From Aave's transparent on-chain banking to Stream Finance's asset management black box, DeFi has undergone a deadly evolution in just a few years.

When the ideal of “decentralization” is distorted into a frenzy of “deregulation,” and the narrative of “professional management” obscures the reality of opaque capital operations, what we obtain is not better finance, but a worse banking industry.

The most profound lesson from this crisis is that we must re-examine the core value of Decentralized Finance: transparency is far more important than the label of decentralization itself.

An opaque decentralized system is much more dangerous than a regulated centralized system.

Because it lacks both the credibility endorsement and legal constraints of a centralized institution, as well as the transparency and verifiable checks and balances that a decentralized system should have.

Matt Hougan, the Chief Investment Officer of Bitwise, once said to all investors in the crypto world: “There are no double-digit returns in the market without risk.”

For every investor attracted by high APY, before clicking the “Deposit” button next time, they should ask themselves a question:

Do you really understand where the returns from this investment come from? If you don't understand, then you are the return.