Fund Managers Transition to Blockchain: The Rise of Curators
Once revered, fund managers in the stock market once represented the aspirations of many retail investors, especially during the A-share market boom. Investors admired these professionals, often boasting prestigious educational backgrounds, and believed that investing in funds was inherently safer and more sophisticated than engaging in direct stock trading. However, the reality revealed itself during market downturns, when the notion of “professionalism” proved inadequate against systemic risks. Compounding this issue, fund managers would collect management fees and performance bonuses, enjoying the fruits of successful investments while leaving investors to shoulder the losses when things went awry. Today, the situation has taken a troubling turn as the role of the fund manager has evolved into what is now termed a “Curator” in the blockchain space. These new managers face no regulatory checks, do not need qualifications, and often conceal their identities. They simply create a “vault” on decentralized finance (DeFi) platforms and attract significant investments with promises of extraordinarily high annualized returns, leaving investors in the dark about the fate of their money.
Stream Finance’s Shocking $93 Million Loss
On November 3, 2025, Stream Finance sent shockwaves through the DeFi landscape by halting all deposits and withdrawals. The following day, the company disclosed that an external fund manager had been liquidated due to severe market volatility on October 11, resulting in a staggering loss of approximately $93 million in assets. As a consequence, the value of Stream’s internal stablecoin, xUSD, plummeted from its intended value of $1 to as low as $0.43 within hours. This incident was not entirely unexpected; 172 days prior, a prominent developer from Yearn had cautioned the Stream team about potential issues. He remarked that a brief discussion and a quick review of their Debank account were enough to foresee a disastrous outcome.
Understanding Stream Finance’s Model
Stream Finance functions as a yield aggregator in the DeFi sector, allowing users to deposit funds into vaults overseen by Curators to earn yields. The platform claims to spread investments across various strategies, both on-chain and off-chain, to maximize returns. The scandal that unfolded can be attributed to two primary factors: first, an external Curator misused user funds for unclear off-chain activities, leading to liquidations on October 11. Second, on-chain analysts uncovered that Stream Finance had excessively leveraged its capital through recursive lending with deUSD in the Elixir protocol. While these practices did not directly cause the losses, they significantly heightened the systemic risks associated with the protocol, setting the stage for a broader collapse.
The Evolution of DeFi and the Curator Model
To grasp the underlying issues of this crisis, it is essential to revisit the foundational principles of DeFi. Traditional DeFi platforms like Aave and Compound are built upon the tenet of “Code is law,” where every transaction adheres to predetermined rules embedded in smart contracts, fostering transparency and immutability. Users contribute to a communal pool of funds, while borrowers are required to provide substantial collateral. The entire mechanism operates algorithmically, devoid of human intervention. Although systemic risks exist—such as vulnerabilities in smart contracts or liquidation threats during market upheavals—these do not stem from the actions of a specific fund manager. In contrast, a new wave of DeFi protocols, like Morpho and Euler, has sought higher returns through a different fund management approach. They contended that Aave’s public pool model was inefficient, leading to the introduction of the Curator model. Instead of a collective pool, users opt for specific vaults managed by Curators, who are entrusted with investment decisions. This model has rapidly gained traction, with data revealing that protocols such as Morpho and Euler have collectively locked over $8 billion in value, indicating a substantial amount of real capital managed by a diverse array of Curators.
The Risks of the Curator Model
While the Curator model appears appealing, it closely resembles peer-to-peer (P2P) lending, where individual investors lack the ability to accurately assess the creditworthiness and repayment capabilities of borrowers. The promised high returns may often mask substantial default risks. The Curator model replicates this challenge, with protocols acting merely as intermediaries. On platforms like Morpho, users can explore various vaults created by different Curators, each advertising attractive annualized yields and brief investment strategies. However, the critical details regarding risks associated with these vaults are often not easily accessible. Even if a user attempts to investigate the risk details, they might only find limited information, such as the specific assets held, while crucial risk factors like leverage ratios remain undisclosed. The vault managers typically do not provide risk assessments, making it difficult for inexperienced users to evaluate the safety of their investments.
Decentralization vs. Centralized Management Risks
Paul Frambot, CEO of Morpho, has compared his platform to a banking infrastructure, implying that while tools are provided, the essential aspects of risk management and capital allocation are delegated to the Curators. Essentially, the so-called decentralization is restricted to the deposit and withdrawal phases, whereas the critical risk management elements are entrusted to unidentified and unregulated managers, resulting in a system of “decentralized transactions but centralized oversight.” Traditional DeFi protocols maintain relative security by minimizing human influence, yet the Curator model reintroduces unpredictable human risks into the equation. When reliance on trust supplants code and transparency devolves into obscurity, the fundamental tenets of DeFi security are undermined.
The Dark Side of the Curator Model
The introduction of the Curator model has opened a Pandora’s box of potential issues, especially when Curators and the agreements they operate under engage in collusion. Curators typically earn through management fees and performance bonuses, creating a strong incentive to pursue high-risk strategies that yield significant returns. This creates a moral hazard where the Curators benefit from profits while users bear the losses. As Arthur, founder of DeFiance Capital, has pointed out, Curators often adopt the mindset that if investments fail, it’s the users’ money at stake, but if they succeed, the profits are theirs. Alarmingly, protocol providers have transformed from regulatory bodies into accomplices in this risky environment. To attract total value locked (TVL) in a competitive market, they entice users with astonishingly high annualized yields, which are often sustained by aggressive strategies employed by Curators. This leads to a troubling dynamic, where protocols ignore or even encourage risky practices by Curators to lure in more users.
The Consequences of the Stream Finance Collapse
Stream Finance serves as a prominent example of this troubling trend, as on-chain data reveals that the platform claimed a TVL of $500 million, while independent sources indicated a peak of only $200 million. This discrepancy implies that an alarming amount of user funds was directed towards obscure off-chain activities, managed by unknown traders, diverging from the transparency expected of DeFi. Following the Stream Finance debacle, RE7 Labs, a recognized Curator organization, admitted to identifying “centralized counterparty risk” associated with Stream’s xUSD before it was listed, yet still chose to proceed due to significant demand. This highlights a willingness to engage with risk for the sake of attracting attention and user engagement, essentially disregarding genuine risk assessments.
The Ripple Effect of Market Volatility
On October 11, 2025, the cryptocurrency market experienced a severe downturn, resulting in nearly $20 billion being liquidated within a single day. This crisis, exacerbated by the previously hidden risks, set off a chain reaction across the DeFi ecosystem. Analysts noted that many Curators employed high-risk off-chain strategies, such as “Selling Volatility,” which depend on market stability. While these strategies can be lucrative in calm markets, they are catastrophic during volatility. The turmoil on October 11 ignited the situation, leading to Stream Finance’s collapse and triggering broader industry repercussions. Although specific strategies leading to losses were not disclosed, market analysis suggests they involved high-risk derivatives trading akin to “selling volatility.” This event marked the beginning of a much larger crisis, as Stream Finance’s tokens were frequently utilized as collateral within various DeFi protocols, thereby instigating a widespread contagion.
Assessing the Impact and Future of DeFi
The ramifications of the Stream Finance incident extend far beyond its own operations. Preliminary assessments indicate that Stream’s direct debt exposure reached $285 million, unveiling a vast network of risk contagion. Among the most affected was the Elixir protocol, which had extended a $68 million loan to Stream, representing a substantial portion of its total reserves. Former partners, such as RE7 Labs, found themselves entangled in the fallout, facing millions in potential bad debt due to the collateral accepted from Stream. The interconnectedness of DeFi protocols, with Stream’s tokens staked in various lending platforms, facilitated a rapid spread of risk throughout the entire ecosystem. Analysts are cautioning that the risk landscape is not yet fully mapped out, and more vulnerabilities are likely to emerge.
Revisiting DeFi Principles in Light of Recent Events
From the transparency of Aave’s traditional on-chain banking to the opaque asset management practices seen in Stream Finance, the DeFi sector has undergone a troubling transformation in a relatively short period. When the ideals of decentralization become twisted into deregulation and the narrative of professional management obscures the reality of fund operations, the outcome can be a financial landscape that is more perilous than traditional banking. The most critical takeaway from this crisis is the need to reassess the fundamental values of DeFi: transparency must take precedence over the decentralized label. An opaque decentralized system poses greater risks than a regulated centralized one, lacking the credibility and legal safeguards that centralized institutions possess, as well as the open, verifiable checks and balances expected in decentralized systems.
Matt Hougan, the chief investment officer at Bitwise, has famously reminded investors that “there is no such thing as a risk-free double-digit return in the market.” For every investor enticed by high annualized yields, it is crucial to reflect before proceeding: do you truly understand the source of these returns? If the answer is unclear, it is likely you are the one bearing the risk.
