Decentralized Finance Fund Managers: Anonymous Gamblers in a Billion Dollar Market

The currently implemented DeFi fund manager model is an accountability vacuum, with billions of dollars of user funds managed by entities with no real constraints on their actions and no tangible consequences of failure. (Synopsis: What is 1inch new shared liquidity protocol Aqua to get dormant DeFi capital moving?) (Background added: Ripple Ripple wants to introduce staking features? CTO discusses the “two-tier consensus model”: adding a DeFi revenue layer to XRP) The currently implemented DeFi fund manager model is an accountability vacuum, where billions of dollars of user funds are managed by entities with no real constraints on their actions and no real consequences of failure. The rise of DeFi fund managers Over the past year and a half, a new class of financial intermediaries has emerged in the DeFi space. These entities refer to themselves as “risk managers”, “vault managers” or “strategic operators”. They manage billions of dollars in user deposits on protocols such as Morpho (about $73 billion) and Euler (about $11 billion), set risk parameters, select collateral types, and deploy yield strategies. They take 5% to 15% of the revenue generated as a performance fee. However, these entities operate without a license, without regulation, without mandatory disclosure of qualifications or track records, and often hide their true identities. November 2025 Stream Finance crash The collapse of Stream Finance in November 2025 fully exposed the fatal flaws of this architecture under pressure. The incident caused chain losses of up to $285 million across the ecosystem. Several fund managers, including TelosC ($123.64 million), Elixir ($68 million), MEV Capital ($25.42 million), and Re7 Labs (two vaults totaling $27.4 million), have highly concentrated user deposits on a single counterparty. The counterparty operates a leverage of up to 7.6x with only $1.9 million in real collateral. The warning signs are already there and very specific. Crypto KOL CBB publicly disclosed its leverage ratio on October 28. Yearn Finance warned the Stream team directly 172 days before the crash. But these warnings are ignored because the existing incentive structure encourages precisely this neglect. Comparison with traditional financial intermediaries The DeFi fund manager model follows the traditional financial routine, but abandons the accountability mechanism that has been learned hard for centuries. Traditional banks or brokers face capital requirements, registration obligations, fiduciary duties and regulatory scrutiny when managing client funds. DeFi fund managers, on the other hand, are only driven by market incentives when managing client funds. Market incentives favor asset accumulation and return maximization over risk management. The agreements that support these managers describe themselves as “neutral infrastructure” and earn fees from activities without being responsible for the risks arising from their activities. This position is simply untenable. Traditional finance abandoned this notion decades ago after many disasters, because the blood lesson shows that fee-earning intermediaries must not be completely exempt from liability. The dual nature of the permissionless architecture Morpho and Euler operate as permissionless lending infrastructure. Anyone can create a vault, set risk parameters, choose collateral and start taking deposits. The protocol provides a smart contract foundation and earns fees from it. This architecture has its advantages: fostering innovation: eliminating potentially vicious competition that can hinder the way new money works due to unfamiliarity or competition. Improving inclusiveness: Serving participants excluded from traditional systems. Enhanced transparency: An auditable record of all transactions is created on-chain. But the architecture also poses fundamental problems, which were exposed in the events of November 2025: No access audit: The quality of managers cannot be guaranteed. No registration requirement: Administrators cannot be held accountable if they fail. Non-identity disclosure: Managers can accumulate losses under one name and then start over under a different name. No capital requirement: Managers have no real interests other than reputation, which can easily be abandoned. As BGD Labs founder Ernesto Boado puts it bluntly: managers are “selling your brand to gamblers for free.” The protocol earns revenue, the administrator earns fees, and the user bears all the losses in the inevitable failure. Typical failure patterns: bad money drives out good money Stream Finance perfectly highlights the specific failure patterns spawned by permissionless architectures. Since anyone can create a vault, managers can only compete for deposits by offering higher yields. Higher returns come either from true alpha returns (rare and unsustainable) or from higher risks (common and catastrophic when they happen). When users see the “18% annualized rate of return”, they stop digging into it and assume that the experts named “risk managers” have done their due diligence. Seeing an opportunity for fee income, managers accepted the risk that prudential risk management should have rejected. Seeing an increase in total lock-up value and fee income, the protocol chose not to intervene because the “permissionless” system should not have been limited. This competition leads to a vicious circle: conservative curators earn less and save less; Radical curators earn well, save a lot, and earn a lot of money until disaster strikes. Markets can't distinguish between sustainable gains and unsustainable risks until failure occurs. Losses are then shared by all participants, and the manager is hardly affected except for a reputation that can be easily abandoned. Conflicts of Interest and Incentive Failures The manager model embeds fundamental conflicts of interest that make failures like Stream Finance almost certain to occur. Divergence of goals: users pursue safety and reasonable returns, and managers pursue fee income. Risk mismatch: This divergence of objectives is most dangerous when revenue opportunities require taking risks that users would otherwise reject. The case of RE7 Labs is very educational. In their due diligence prior to the integration of xUSD, they correctly identified “centralized counterparty risk” as a hidden concern. Stream concentrates risk on an anonymous outside fund manager whose positions and strategies are completely opaque. RE7 Labs was aware of the risks, but continued to push for integration on the grounds of “high user and network demand.” The lure of fee income outweighs the risk of user funds. When funds are lost, RE7 Labs only suffers reputational damage, while users bear 100% of the financial losses. This incentive structure is not only a mismatch, but also a proactive punishment for prudential behavior: managers who reject high-risk, high-yield opportunities flow their deposits to risk-embracing competitors. Prudent managers have low fees and appear to be underperforming. Reckless managers have high fees and large deposits until they are revealed. Huge fees earned during this period can still be retained. Many managers put user funds into xUSD positions without adequate disclosure, exposing depositors unknowingly to Stream's leverage and off-chain opaque risk of up to 7.6x. Asymmetric fee structure Managers typically take a 5%-15% performance fee from revenue. This seems reasonable, but it is actually very asymmetrical: Share the benefits: The manager shares the upside profits. No loss: There is no corresponding exposure to downside losses. Example: A $100 million deposit generates …