📣 DeFi Risk Management: Paternalism vs. Invisible Hand 🤔

In the world of decentralized finance (DeFi), risk management is a crucial aspect of sustainable lending protocols. The challenge lies in balancing paternalistic risk management (governed by DAOs and risk managers) with the free market's invisible hand determining risk tolerance.

Euler v1's $200 million exploit in 2023 highlights the debate between immutable and governed code in DeFi lending protocols. Despite rigorous auditing and insurance, a minor bug led to a larger attack vector, raising questions about the effectiveness of paternalism in DeFi.

Risk management models in DeFi lending protocols can be broadly classified into three categories:

1. Global paternalism via DAO governance (e.g., Euler v1, Compound v2, Aave v2/v3, Spark)

2. The invisible hand via isolated pools (e.g., Kashi, Silo, Compound v3, Morpho Blue, Ajna, FraxLend)

3. Local paternalism via aggregators (e.g., Yearn, Idle, MetaMorpho)

Each model has its pros and cons, but the future of DeFi lending may lie in modularity and flexibility, allowing users to seamlessly switch between different risk management models based on their preferences.

What do you think is the best approach to risk management in DeFi lending protocols? Share your thoughts in the comments! 👇