Onchain Finance has promise, and blind spots

This week’s security and liquidity events in DeFi offer a salient reminder to traditional finance: if you have exposure to DeFi protocols and experimenting with onchain yield, be aware of the risks. 

What happened

A vault-style protocol, Stream Finance, disclosed a loss of approximately US $93 million, triggering a suspension of withdrawals and deposits and the de-pegging of its stablecoin.
Independent on-chain analysts (YieldsAndMore) have since mapped out a potential exposure of ~US $285 million across DeFi lending markets, stablecoins and vault networks tied indirectly to Stream’s tokens (xUSD, xBTC, xETH). Critically, the incident illustrates three structural issues that should raise red flags for banks and fintechs entering or expanding into on-chain yield and lending markets:

1. Opacity of yield-generation models: Many vaults and “curator”-led pools (for example on Morpho or Euler Finance) aggregate complex yield strategies and rehypothecate collateral across multiple layers and protocols without the same transparency or auditability as a regulated fund.
   
   
2. Leverage + rehypothecation = systemic risk: The more a platform borrows, leverages, re-uses collateral (“recursive looping”), the more brittle the system becomes to an adverse event. The Stream episode shows how losses in one vault can cascade through lending markets.
   
   
3. Misalignment of risk and yield: The higher the advertised APY, the more questions TradFi should ask about risk controls, withdrawal rights, counter-party exposures, governance and permissioning. As one on-chain analyst put it: “The role of the Curator … is being thrust into the spotlight.”
   
   

Why this matters to banks and fintechs

As institutions integrate with on-chain lending products and experiment with DeFi yield strategies, the same foundational questions apply as in TradFi, but with new twists:

• Where is the yield really coming from? Is it organic, collateral-based lending, or a cascade of leveraged strategies? Hidden exposures may not show up in a simple GL-line.
  
  
• Who controls the collateral and permissions? In many DeFi setups, users’ funds remain non-custodial in smart contracts, and “curators” or earn-strategies may retain substantial discretion.
  
  
• What happens if things go wrong? Control rights, governance mechanisms and exit pathways become critical; especially for a bank with fiduciary or regulatory obligations.
  
  
• How do you monitor risk in real time? Traditional monthly or quarterly risk reviews are inadequate when you’re dealing with on-chain positions, composability and fast-moving markets.
  
  

How Forta is helping: On-chain Risk Management for TradFi

At Forta we recognise that as banks and fintechs move “on-chain,” they require the same quality of risk instrumentation they’re used to in TradFi, but adapted for blockchain rails. Forta Firewall is designed to bring transparency and control into the on-chain era:

• Real-time monitoring of on-chain exposures: Track vaults, lending markets, collateral flows and counter-party behaviour at smart-contract speed, not with lagging reports.
  
  
• Risk alerts: Set threshold-based alerts (e.g., utilisation > x %, liquidity issues, oracle deviations, bad debt) so you’re notified of trouble before it becomes a headline.
  
  
• Customisable dashboards: For banks and fintechs tokenising assets, embedding DeFi strategies or investing in yield-generating protocols, we provide helpful dashboards to give your team a real-time view of on-chain risks.
  
  
• Bridging TradFi controls and DeFi innovation: We help translate on-chain exposures into familiar risk metrics (e.g., concentration, liquidity risks, solvency risks, etc.) so that compliance teams and risk functions can engage confidently.

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