What is the role of a Curator in DeFi? Will it be a hidden risk in this cycle?

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

Original author: Azuma

Original source:

Reprint: Mars Finance

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 significant potential risks associated with the role of Curator, which has become crucial in the DeFi market.

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

Unlike traditional centralized financial services, Curator does not have direct access to or control over user funds. The assets deposited by users into the lending protocol will always be stored within a non-custodial smart contract, and Curator's permissions are limited to configuring and executing strategy operations through the contract interface, with all operations subject to the contract's security constraints.

Market Demand for Curators

The original intention of Curator was to leverage its professional strategy management and risk control capabilities to bridge the supply and 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 maximize their returns; on the other hand, it can also assist 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 provide more substantial returns than traditional lending markets (such as Aave), this model naturally attracts capital interest. Data from Defillama shows that the total scale of liquidity pools managed by Curator has rapidly increased over the past year, surpassing 10 billion USD on October 31, and as of the time of writing, it still reports at 8.19 billion USD.

In the intense competition, Gauntlet, Steakhouse, MEV Capital, and K3 Capital have gradually become some of the largest Curators in terms of managed scale, each managing enormous funds in the hundreds of millions. At the same time, lending protocols such as 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.

The profit model of Curator

Seeing this, the role of the Curator seems very clear and there is sufficient market demand. So why does this pose a potential risk threatening the world of Decentralized Finance?

Before analyzing the risks, we need to first understand the profit logic of the Curator business. Curator primarily relies on the following methods to generate profits:

· Performance sharing: After the strategy generates profits, the Curator receives a share of the net profits based on a certain percentage;

· Fund management fee: Charged at a certain annualized rate based on the total asset size of the fund pool;

· Protocol incentives and subsidies: Lending protocols generally issue token incentives to Curators to encourage them to create new high-quality strategies;

· Brand derivative income: for example, Curator can also launch products or even tokens on its own after establishing the brand.

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

This profit model determines that the larger the fund pool managed by the Curator and the higher the strategy yield, the greater the Curator's profit will be — of course, theoretically, the Curator can also increase the revenue by raising the sharing ratio, but in the relatively fierce market competition, no Curator dares to arbitrarily take food from users.

At the same time, since most depositors are not sensitive to the brand differences of Curator, the choice of which pool to deposit into often depends solely on the apparent APY figures. This means that the attractiveness of the fund pools is directly linked to the strategy yield, making the strategy yield the core factor that ultimately determines the income situation of Curator.

Under the drive of yield, risks are gradually being ignored.

Sensitive readers may have already realized that problems are emerging. In a yield-driven model, Curators must constantly seek out higher-yield “opportunities” to achieve greater profits, and yield is often positively correlated with risk. This leads some Curators to gradually blur the safety issues that should be prioritized, opting to take risks—“After all, the principal is the user's, and the profit is mine.”

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

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 it.

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 security responsibilities.

Will the curator pose greater risks?

After the incident with Stream Finance, the Curator and its potential risk impacts have attracted 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 from the previous cycle. Indeed, if we look at it solely from a data perspective, the total value of the Curator fund pool, which has exceeded 8 billion USD, already has an impact scale comparable to the black swan events in the last cycle. Furthermore, the current situation of Curator being present in mainstream lending protocols means that the impact range cannot be ignored.

So, will Curator trigger larger scale risk incidents in this cycle? This is a difficult question to answer. From the original intention of Curator's existence, this role should reduce the individual risks of ordinary users through its specialized management capabilities, but its business model and profit path make Curator itself very easy to become an entry point for concentrated risks. For example, if multiple lending protocols in the market rely on a few Curators, once their models have unexpected deviations (such as oracle price errors), it will lead to all parameters being misadjusted simultaneously, thereby affecting multiple funds pools at the same time.

Additionally, it is worth mentioning that in the current market environment, many users who have deposits in lending protocols have a limited understanding of the role and existence of Curators, instead simply believing that they are just putting funds into a well-known lending protocol for interest. This has led to the role and responsibility of Curators 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 profit 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 reputational risk and the responsibility to care for users, whether they want to or not, and a few poorly managed or non-compliant Curators can also impact the platform.”

I personally do not believe that leveraging Curator to operate liquidity pools is a failed business model, and I also have funds in some Curator liquidity pools (currently only remaining in Steakhouse). However, I also acknowledge that the radical tendencies of some Curators may breed broader risks. The deeper reason for this situation lies in the user base and the inadequate risk control of certain Curators, and due to the profit-driven motivations mentioned earlier, the latter may have some subjective factors.

Although we constantly urge users to evaluate protocols, liquidity pools, and strategy configurations on their own, this is clearly difficult to achieve since most users do not have the time, expertise, or willingness to do so. In this context, most users unwittingly invest their funds into the Curator liquidity pools, which generally offer relatively higher yields, thereby driving the rapid growth of the funds managed by Curator. In turn, some Curators are also adept at leveraging this situation to attract more funds, while using more aggressive strategies to enhance the yield of the liquidity pools, which subsequently attracts more capital inflow through higher yields.

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 their own 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 pool. Research considerations include but are not limited to:

· Are there any publicly available risk models or stress test reports?

· 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 is best to prepare for the most extreme situations—always keep in mind the words of Bitwise's Chief Investment Officer Matt Hougan: “The vast majority of cryptocurrency collapses are due to investors mistakenly believing in double-digit risk-free returns, while there are fundamentally no double-digit returns without risk in the market.”

As for the Curator, there is a need 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:

· Have a compliance awareness in the traditional financial sector;

· Risk management and return optimization of the portfolio;

· Understand new tokens and Decentralized Finance mechanisms;

· Understand oracles and smart contracts;

· Possesses the ability to monitor the market and perform intelligent reconfiguration.

As for the lending agreement directly associated with the Curator, it should continuously optimize constraints on the Curator by requiring the Curator to disclose the strategy model, autonomously verifying the data of the model, introducing a staking penalty mechanism to maintain accountability for the Curator, and regularly evaluating the Curator's performance to determine whether to replace it. Only through continuous proactive monitoring can the risk space be minimized, thus more effectively avoiding the risk resonance of the entire system.