How To Make DeFi Great Again | Adrian Vasiljevic & Luca Prosperi

Experts dissect why on‑chain lending yields sit near risk‑free, where hidden liquidation and OPSEC risks lurk, and how insurance, prediction markets, and primitives can rebuild DeFi term structures.

Key Takeaways

Overcollateralized BTC/ETH vault yields are compressed near SOFR—typically tens to a few hundred basis points; evaluate protocol design, curator incentives, and market flows before depositing.
Primary risks: rapid liquidations, oracle/exchange compromise, OPSEC/multisig failures, and upgrade/backdoor risk—binary, hard-to-price losses that require explicit LGD and capital buffers.
Model pricing with option/Merton frameworks and scenario probabilities; allow adjustable LGD (examples: 5% vs near-zero) and iteratively stress-test tail events.
Insurance and prediction markets can express uncorrelated hack/OPSEC risk but face liquidity, moral-hazard, and incentive issues; build long-dated balance sheets or buy traditional uncorrelated cover.
Product fixes: unbundle primitives, isolate markets (prime vaults), embed point-of-sale insurance, and stream on-chain risk-free rates to enable longer-term DeFi products and term structures.
Operational best practices: prefer human circuit breakers and timelocks, publish security-spend/TVL metrics, vet curators, maintain conservative capital buffers, and require audits/OPSEC controls.

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