Will the Curator mode become the next systemic risk for Decentralized Finance?

Author: Azuma, Odaily Odaily Daily

Original title: What is the role of Curator in DeFi? Could it be a hidden danger in this cycle?

The consecutive occurrence of two major security incidents (Balancer, Stream Finance) has once again brought the issue of DeFi security to the forefront, especially the Stream Finance incident, which has exposed the enormous potential risks associated with the Curator role that has become significant in the DeFi market.

The so-called Curator primarily exists within DeFi lending protocols (such as Euler and Morpho affected by the recent Stream event) and usually refers to individuals or teams responsible for designing, deploying, and managing specific “strategized funding pools (vaults).” Curators typically package relatively complex yield strategies into user-friendly funding pools, allowing ordinary users to “deposit with one click to earn interest,” while the Curator decides on the specific yield strategies for the assets in the backend, such as allocation weights, risk management, rebalancing periods, withdrawal rules, and so on.

Odaily Note: The above image shows the Curator liquidity pool on Morpho, with the Steakhouse, Gauntlet, and other names in the red box representing the entities responsible for designing, deploying, and managing this liquidity pool.

Unlike traditional centralized financial services, Curator cannot directly access or control user funds. Assets deposited into the lending protocol will always be stored in a non-custodial smart contract, and Curator's authority is limited to configuring and executing strategy operations through the contract interface, with all actions subjected to the contract's security restrictions.

Market Demand for Curators

The original intention of Curator was to leverage its professional strategy management and risk control capabilities to bridge the supply-demand matching issues in the market — on one hand, helping ordinary users who find it difficult to keep up with the increasingly complex DeFi to amplify their returns; on the other hand, also assisting lending protocols in expanding their TVL while reducing the probability of systemic events.

Due to the fact that the liquidity pools managed by Curator often offer more substantial returns than traditional lending markets (such as Aave), this model naturally attracts the favor of funds. Defillama data shows that the total scale of the liquidity pools managed by Curator has rapidly grown over the past year, surpassing 10 billion USD on October 31, and as of the time of this writing, it still reports at 8.19 billion USD.

In the fierce competition, Gauntlet, Steakhouse, MEV Capital, and K3 Capital have gradually become some of the largest Curators in terms of managed scale, each managing massive amounts of capital in the hundreds of millions. Meanwhile, lending protocols like Euler and Morpho, which focus on the Curator pool model, have also achieved rapid growth in TVL, successfully positioning themselves in the market's upper tier.

Curator's Profit Model

From what we can see, the role of the Curator seems quite clear and there is sufficient market demand. So why does this pose a potential risk threatening the DeFi world?

Before analyzing the risks, we need to first understand the profit logic of the Curator business. Curator mainly relies on the following ways to make a profit:

• Performance Sharing: After the strategy earns profits, the Curator shares a certain percentage of the net profits.
• Fund management fee: Charged based on the total asset scale of the capital pool at a certain annualized rate;
• Protocol incentives and subsidies: Lending protocols typically provide token incentives to Curators to encourage them to create new high-quality strategies;
• Brand-derived income: For example, Curator can also launch products or even tokens on its own after building a strong brand.

In real-world situations, performance sharing is the most common source of income for Curators. As shown in the figure below, the USDC fund pool managed by MEV Capital on the Ethereum mainnet will charge a 7% performance share.

This profit model determines that the larger the fund pool managed by the Curator and the higher the strategy return rate, the greater the profit for the Curator — of course, theoretically, the Curator could also increase the sharing ratio to boost income, but in the context of relatively fierce market competition, no Curator dares to arbitrarily take from users.

At the same time, since most deposit users are not sensitive to the brand differences of Curator, the choice of which pool to deposit often depends only on the visible APY figures. This means that the attractiveness level of the fund pool is directly linked to the strategy yield, making the strategy yield the core factor that ultimately determines the revenue situation of Curator.

Under the drive of yield, risks are gradually being overlooked

Sensitive readers may have already realized that there is a problem. In the yield-driven model, Curators can only achieve higher profits by continuously seeking “opportunities” with higher yields, and yield is often positively correlated with risk. This leads some Curators to gradually blur the safety issues that should have been prioritized, choosing to take risks—“After all, the principal belongs to the users, while the profit is mine.”

Taking Stream Finance as an example, a key reason for such a large-scale impact at this time is that some Curators on Euler and Morpho (including well-known brands like MEV Capital and Re7) ignored the risks and allocated funds to the xUSD market of Stream Finance, which directly affected users depositing into the relevant Curator's liquidity pool, leading to bad debts within the lending protocol itself, thereby indirectly expanding the scope of the impact.

Odaily Note: The image shows the整理 of various Curator-related debt positions in the Stream Finance event by the DeFi community YAM.

A few days before the Stream Finance incident, several KOLs and institutions, including CBB (@Cbb0fe), had warned about the potential transparency and leverage risks of xUSD, but these Curators clearly chose to ignore them.

Of course, not all Curators have been affected by Stream Finance. Major Curators such as Gauntlet, Steakhouse, and K3 Capital have never deployed funds to xUSD, which also indicates that professional entities like Curators are capable of identifying and avoiding potential risks while effectively fulfilling their safety responsibilities.

Will the Curator pose greater risks?

After the incident at Stream Finance, the Curator and its potential risk impacts have drawn more attention from people.

Chorus One investment analyst Adrian Chow posted on X directly comparing Curator and its related lending protocols to Celsius and BlockFi in this cycle. Indeed, if we look at it purely from a data perspective, the total value of the Curator fund pool, which has surpassed 8 billion dollars, has an impact scale comparable to the black swan events of the previous cycle. Moreover, the fact that Curator is present across mainstream lending protocols indicates a significant influence that cannot be ignored.

So will Curator actually trigger a larger-scale risk incident in this cycle? This is a difficult question to answer. From the original intention of Curator's existence, the role was supposed to reduce the individual risks of ordinary users through its specialized management capabilities, but its business model and profit path make it very easy for Curator itself to become a point of concentrated risk. For example, if several lending protocols in the market rely on a few Curators, once there is an unexpected deviation in their model (such as an oracle price error), it will lead to all parameters being misadjusted simultaneously, thus affecting multiple liquidity pools at once.

Additionally, it should be mentioned that in the current market environment, many users who deposit in lending protocols are not even aware of the role of Curator, instead simply believing that they are just investing their funds into a well-known lending protocol to earn interest. This has led to the role and responsibilities of Curator being obscured, and when incidents occur, it is the lending protocol that has to directly face the users' anger and accountability, which further encourages some Curators to pursue profits too aggressively.

Arthur, the founder of DeFiance Capital, also talked about this phenomenon yesterday: “This is why I have always been skeptical of the Curator-based DeFi lending model. Lending platforms bear the reputation risk and responsibility to take care of users, whether they want to or not, a few poorly managed and non-compliant Curators can also impact the platform.”

I personally do not believe that leveraging Curator to operate a capital pool is a failed business model, and I also have funds in some Curator capital pools (currently only remaining in Steakhouse), but I agree that the aggressive tendencies of some Curators may brew larger risks. The deeper reason for this situation lies in the user base and the lack of risk control by some Curators, and due to the profit-driven motives mentioned earlier, the latter may have certain subjective factors.

Although we always call on users to evaluate protocols, liquidity pools, and strategy configurations on their own, this is clearly difficult to achieve, as most users do not have the time, expertise, or willingness to do so. In this context, most users unconsciously invest their funds into the Curator liquidity pool, which generally offers relatively higher yields, thereby driving the rapid growth of the managed fund scale of Curator. In turn, some Curators are also adept at leveraging this situation to attract more funds, while increasing the liquidity pool's yield through more aggressive strategies, which in turn attracts even more inflows due to the higher yield.

How to improve the current situation?

Growth always requires experiencing growing pains. Although the Stream Finance incident has dealt another blow to the DeFi market, it may serve as an opportunity for users to enhance their understanding of Curator and for the market to improve the constraints on Curator's behavior.

From the user's perspective, we still recommend that users conduct independent research as much as possible. Before investing funds into a specific Curator fund pool, they should pay attention to the reputation of the Curator entity and the design of the related fund pools. Research ideas include but are not limited to:

• Is there a public risk model or stress test report?
• Are the permission boundaries transparent? Are they subject to multi-signature or governance restrictions?
• What is the drawdown frequency of past strategies and how do they perform in extreme market conditions?
• Has there been a third-party audit?
• Is the incentive mechanism aligned with user interests?

Most importantly, users need to be aware that risk is always positively correlated with returns. Before making investment allocation decisions, it's best to think through the most extreme scenarios — always keep in mind the words of Bitwise Chief Investment Officer Matt Hougan: “The vast majority of cryptocurrency collapses occur because investors mistakenly believe in double-digit risk-free returns, whereas there are fundamentally no risk-free double-digit returns in the market.”

As for the Curator, it is necessary to simultaneously enhance risk self-discipline awareness and risk management capabilities. The DeFi research institution Tanken Capital has summarized the basic requirements for an excellent Curator in terms of risk control, which specifically include:

• Possess compliance awareness in traditional financial fields;
• Risk management and return optimization of the investment portfolio;
• Understand new tokens and DeFi mechanisms;
• Understand oracles and smart contracts;
• Capable of monitoring the market and performing intelligent reconfiguration.

As for the lending agreements that are directly associated with the Curator, they should continuously optimize the constraints on the Curator by requiring the Curator to publicly disclose the strategy model, autonomously validate the model's data, introduce a staking penalty mechanism to maintain accountability towards the Curator, and regularly evaluate the Curator's performance to decide whether to replace them, among other methods. Only through continuous active monitoring can we effectively minimize the risk space and avoid the risk resonance of the entire system.