DeFi’s Accountability Gap: Risks and the Path to Reform

Key Takeaways

• DeFi’s rapid expansion has introduced a new financial intermediary, the “Curator,” who operates with little accountability, leading to systemic risks and losses.
• The collapse of Stream Finance in 2025 highlights the flaws in the current DeFi model, including a lack of regulation, identity disclosure, and risk constraints.
• Without accountability mechanisms, risk curators prioritize short-term profits, often at the expense of users, leading to a “race to the bottom” in yield generation.
• Proposed reforms include mandatory identity disclosure, capital requirements, transparency in strategies, and reserve proof to mitigate systemic risks and align the interests of managers and users.

Decentralized Finance (DeFi) has revolutionized the financial landscape since 2020, bringing about remarkable growth and opportunities. However, with this growth has come increased risk, particularly with the rise of a new type of financial intermediary known as “Curators.” These curators—risk managers, treasury managers, or strategy operators—control billions in user funds without regulatory oversight or accountability mechanisms. The collapse of Stream Finance in 2025 serves as a stark warning of the systemic failures inherent in this model.

The Emergence of Risk Curators in DeFi

The past few years have seen the rise of entities calling themselves Risk Curators in the DeFi ecosystem. These curators manage vast sums of money across different platforms such as Morpho and Euler. Despite handling billions in user deposits, they operate without licenses, regulatory scrutiny, or mandatory qualifications. Their primary function is to set risk parameters, select collateral types, and deploy user funds into various yield strategies—all while collecting significant performance fees. However, the collapse of Stream Finance reveals the vulnerabilities and potential for systemic risks when these curators act without accountability.

Stream Finance Collapse: A Case Study

In November 2025, Stream Finance’s collapse exposed the inherent dangers of an unregulated DeFi environment. With $285 million in losses due to high leverage and poor risk management, this incident highlighted the contagion effect within DeFi. Risk Curators like TelosC and Elixir concentrated user deposits with a single counterparty who, with minimal real collateral, leveraged assets unsustainably. Despite warnings, the incentive structures encouraged risk-taking over prudent management, reminiscent of the systemic failures in traditional finance before regulations were enforced.

The Systemic Flaws of Permissionless Architecture

The permissionless nature of DeFi platforms, such as Morpho and Euler, facilitates innovation but also allows unchecked risks. Anyone can become a risk manager, leading to competition for deposits by offering high yields. These yields often come at the expense of higher risks or unsustainable practices. The absence of gatekeepers, registration requirements, and capital thresholds means that failures like Stream Finance are inevitable. Users, lured by promises of high returns, often overlook the underlying risks, contributing to a cycle of reckless behavior and eventual collapse.

Conflicts of Interest and Incentive Failures

Risk strategists in DeFi face inherent conflicts of interest, prioritizing fee income over user safety and sustainable returns. Cases like RE7 Labs demonstrate how due diligence identifies risks, yet commercial incentives drive strategists to ignore these warnings. This misalignment of incentives not only encourages reckless behavior but penalizes prudent risk management.

The Void of Accountability in DeFi

Traditional finance has built accountability mechanisms over centuries, but DeFi still lacks similar structures. When customer funds are lost in DeFi, the consequences are limited to reputational damage. This accountability void allows entities to operate under pseudonyms, avoiding legal liability and professional sanctions. The lack of identity disclosure and regulatory oversight makes it challenging to hold curators responsible, and without consequences, they are incentivized to continue risky practices.

The Illusion of Professionalism and Black-Box Strategies

Many DeFi strategists present themselves as experts, but lack the infrastructure and intent to manage risk effectively. The lack of meaningful disclosure on strategies, leverage ratios, and counterparty risks contributes to an environment ripe for fraud and error. The collapse of Stream Finance illustrates how opaque operations can sustain deception until catastrophic failure occurs.

Path to Reform: Recommendations for Accountability

To prevent further systemic failures, several reforms are necessary:

• Mandatory Identity Disclosure: Entities managing large deposits should disclose their true identities to ensure accountability in cases of fraud or negligence.

• Capital Requirement: Risk Planners should maintain risk capital, which can be slashed in cases of excessive losses, aligning incentives with user interests.

• Transparency and Disclosure: Strategies, leverage ratios, and counterparty risks should be disclosed in a standardized format, allowing users to understand associated risks.

• Proof of Reserves: Risk managers should provide reserve proof to verify solvency and protect user funds.

• Concentration Limits: The protocol should enforce limits on the percentage of treasury deposits that can be allocated to a single counterparty to mitigate concentration risks.

• Protocol Accountability: Protocols earning fees from risk manager activities should bear some responsibility for user losses, perhaps through insurance funds or risk manager whitelists.

The current lack of accountability in DeFi leads to repeated failures. The industry must implement mechanisms to hold intermediaries accountable for the risks they trigger, aligning with lessons from the traditional finance sector.

FAQs

What are Risk Curators in DeFi?

Risk Curators are financial intermediaries in DeFi who manage user funds, set risk parameters, and deploy assets, often without regulatory oversight or mandatory qualifications.

Why did Stream Finance collapse in 2025?

Stream Finance collapsed due to high leverage, poor risk management, and a systemic lack of accountability within the DeFi model, leading to significant user losses.

How does the permissionless architecture contribute to DeFi risks?

The permissionless nature of DeFi allows anyone to manage funds, leading to unchecked risks, high-yield promises, and eventual systemic failures without proper oversight.

What reforms are proposed for improving accountability in DeFi?

Proposed reforms include mandatory identity disclosure, capital requirements, transparency in strategies, and reserve proof to align incentives and protect user funds.

How does the lack of accountability affect DeFi users?

Without accountability, risk curators can engage in reckless behavior without consequences, leaving users vulnerable to significant financial losses when failures occur.