Is the on-chain "subprime crisis" already emerging? The path to maturity for DeFi structured products

Chaos Labs

Compiled by: AididiaoJP, Foresight News

The Rise of Risk Managers and On-Chain Capital Allocators (OCCA)

DeFi has entered a new structured phase, where institutional trading strategies are being abstracted into composable, tokenizable assets.

It all began with the emergence of liquidity staking tokens, and Ethena Labs’s tokenized basis trading became a pivotal turning point for structured products in DeFi. This protocol packages a delta-neutral hedging strategy, which requires 24-hour margin management, into a synthetic USD token that users can participate in with a single click, redefining their expectations for DeFi.

Previously exclusive to trading departments and institutions, yield products are now mainstream. USDe has become the fastest stablecoin to reach a total lock value of 10 billion USD.

Ethena’s success confirms the market’s strong demand for “institutional strategy tokenization.” This shift is reshaping market structures and giving rise to a group of “risk managers” or “on-chain capital allocators,” who bundle complex yield and risk strategies into simpler products for users.

What are Risk Managers and On-Chain Capital Allocators (OCCA)?

Currently, there is no unified definition in the industry for “risk managers” or “OCCA.” These labels encompass various designs, but share the common trait of re-packaging yield strategies.

Note from the translator: OCCA stands for Onchain Capital Allocator, referring to professional fund managers or asset administrators in DeFi who attract user funds by packaging complex strategies into simple products.

OCCAs typically launch strategy products with branding, while risk managers often utilize modular money markets (like Morpho and Euler), offering yields through parameterized vaults. The total lock value of these products surged from less than 2 million USD in 2023 to 20 billion USD, an increase of about ten thousand times.

This growth raises several fundamental questions:

Where are deposits invested?

What protocols or counterparties are funds exposed to?

Can risk parameters be flexibly adjusted during extreme volatility? What assumptions are they based on?

What is the liquidity of underlying assets?

What are the exit paths in case of large redemptions or runs?

Where exactly is the risk hidden?

On October 10, the cryptocurrency market experienced the largest altcoin crash in history, affecting centralized exchanges and perpetual contracts DEXs, triggering cross-market liquidations and auto-deleveraging.

However, tokenized delta-neutral products seemed relatively unaffected.

Most of these products operate like black boxes; aside from prominently displayed APY and marketing slogans, little information is provided. A few OCCAs indirectly disclose protocol exposure and strategy details, but key data such as position levels, hedging venues, margin buffers, real-time reserves, and stress testing strategies are rarely public; even when disclosed, often selectively or with delays.

Without verifiable tags or trading footprints, users find it difficult to assess whether a product’s resilience stems from robust design or luck, or even from delayed financial disclosures. Often, they cannot even determine if losses have occurred.

We observe four recurring weak points in these designs: centralized control, re-mortgaging, conflicts of interest, and lack of transparency.

Centralization

Most yield “black boxes” are managed via multi-signature wallets controlled by external accounts or operators responsible for custody, transfer, and deployment of user funds. This concentration of control means that operational errors—such as private key leaks or signer coercion—can lead to catastrophic losses. It echoes past bridge attack patterns: even without malicious intent, intrusion into a single workstation, phishing links, or misuse of emergency permissions by internal staff can cause significant damage.

Re-mortgaging

In some yield products, collateral is reused across multiple vaults. One vault deposits or lends to another, which then recycles into a third. Investigations have found circular lending patterns: deposits are “washed” through multiple vaults, artificially inflating TVL, creating recursive “mint - lend” or “borrow - supply” chains, continuously accumulating systemic risk.

Conflicts of Interest

Even with all parties acting in good faith, setting optimal supply/lending caps, interest rate curves, or choosing appropriate oracles is challenging. These decisions involve trade-offs. Excessively large or unlimited markets may deplete exit liquidity, causing liquidation failures and potential manipulation. Conversely, overly restrictive caps limit normal activity. Ignoring liquidity depth in interest rate curves can trap lenders’ funds. When curators’ performance is judged by growth, conflicts intensify—they may have interests misaligned with depositors.

Transparency

The market crash in October revealed a simple fact: users lack effective data to assess risk positions, risk tagging methods, and whether supporting assets are always sufficient. While real-time disclosure of all positions may be risky due to front-running or liquidation, some transparency is feasible. For example, visibility at the portfolio level, disclosure of reserve asset composition, and aggregated hedge coverage per asset can be verified through third-party audits. Systems can introduce dashboards and proofs, reconciling custody balances, vault positions, and liabilities, providing reserve proofs and governance without exposing transaction details.

A Feasible Path Forward

Currently, these wrapped yield products are moving DeFi away from its original principles of being “non-custodial, verifiable, and transparent.” This shift is not inherently problematic. The maturation of DeFi creates space for structured strategies, which do require operational flexibility and some centralization.

But accepting complexity does not mean accepting opacity.

Our goal is to enable operators to run complex strategies while maintaining transparency for users, finding a practical middle ground.

To achieve this, the industry should focus on:

Reserve Proofs: Beyond promoting APY, protocols should disclose underlying strategies, conduct regular third-party audits, and implement Proof of Reserve (PoR) systems, allowing users to verify asset backing at any time.

Modern Risk Management: Existing solutions can price structured yield products and manage risks, such as risk oracles used by protocols like Aave, which optimize parameters within decentralized frameworks to maintain market health and safety.

Reducing Centralization: This is an ongoing issue. Bridge attacks have already prompted the industry to address upgrade permissions, signer collusion, and opaque emergency powers. Lessons learned include adopting threshold signatures, key role separation, proposal/approval/execution workflows, minimal hot wallet balances with instant financing, whitelisted withdrawal paths, time-locked upgrades via public queues, and strictly limited emergency permissions.

Limiting Systemic Risk: Collateral reuse is inherent in insurance or re-pledging products, but re-mortgaging should be limited and transparently disclosed to prevent circular minting and lending loops among related products.

Transparency of Incentives: Incentives should be as open as possible. Users need to understand the interests of risk managers, whether related-party relationships exist, and how changes are approved. This transforms black boxes into assessable contracts.

Standardization: The on-chain wrapped yield asset industry, now reaching 20 billion USD, should establish minimum standards for classification, disclosure requirements, and event tracking mechanisms.

Through these efforts, on-chain wrapped yield markets can retain their professional, structured advantages while leveraging transparency and verifiable data to protect users.

Conclusion

The rise of OCCAs and risk managers is an inevitable stage of DeFi’s evolution into structured products. Since Ethena demonstrated that institutional strategies can be tokenized and distributed, a professional asset management layer focused on money markets has become inevitable. This layer itself is not problematic; the issue lies in the operational freedom that underpins it, which should not replace verifiability.

The solution is straightforward: publish reserve proofs corresponding to liabilities, disclose incentives and related parties, limit re-mortgaging, reduce single-point control through modern key management and change control, and incorporate risk signals into parameter management.

Ultimately, success depends on being able to answer three key questions at any time:

Is my deposit truly backed by assets?

What protocols, venues, or counterparties are my assets exposed to?

Who controls the assets?

DeFi does not need to choose between complexity and fundamental principles. Both can coexist, and transparency should scale with complexity.