The rapid growth of DeFi has brought about a new wave of institutional investment, but it also poses a challenge to the underlying principles of decentralization.
Traditionally, financial institutions managed assets on behalf of their clients, taking a fee in the process. However, DeFi's promise was to eliminate intermediaries and give individuals direct control over their finances.
The emergence of institutional players has led to the creation of vault structures that resemble traditional financial models. These vaults manage user deposits and invest them in various assets, earning fees from their clients. While this may seem beneficial for users, it creates misaligned incentives where managers prioritize attracting deposits and fees over user interests.
Stream Finance is a notable example of this phenomenon, where the company's risk profile diverged significantly from its initial promise to provide 'institutional-grade' services. The result was a loss of $93 million for users who were unaware of the increased risk they were taking on.