Crypto: There Is No Trust In Defi Without Proper Risk Management 2026

DeFi's composability creates cascading exploit risks while protocols handle risk idiosyncratically. Institutional adoption demands TradFi-style standardized frameworks.

Opinion by: Robert Schmitt, founder and co-CEO at Cork

DeFi has entered its institutional phase. As large investors dip their toes into crypto ETFs and digital asset treasuries (DATs), the ecosystem is gradually evolving into an institutional-grade financial system in its own right, with the introduction of new financial instruments and digital counterparts of well-established ones.

​DeFi’s current growth exposes mounting risks that could lead to trust roadblocks. For institutions to confidently onboard, the ecosystem must implement stronger risk guardrails and resilient infrastructure.

It’s worth exploring the main areas where risk is concentrated, how TradFi handles similar challenges, and the guardrails DeFi needs to safely scale institutional participation.

Let's start with protocol risk. DeFi’s composability is both its strength and its Achilles heel. The interlinking of LSTs, lending markets and perpetuals increases systemic dependency. A single exploit can cascade across protocols.

Followed by reflexivity risk, consider how staking derivatives and looping strategies create positive feedback loops that magnify market swings. As prices rise, collateral expands and leverage increases.

When prices fall, however, liquidations accelerate in the same manner, without coordinated circuit breakers.

Lastly, duration risk as lending and staking markets mature may become increasingly critical, given the need for predictable access to liquidity. Institutions need to understand the types of duration risks present in the markets they participate in. Not many are aware that the advertised withdrawal timelines for many protocols actually depend on solver incentives, strategy cooldowns and validator queues.

DeFi’s next challenge is not more yield or higher TVL. DeFi’s next challenge is building trust. To bring the next trillion in institutional capital onchain, the ecosystem needs standardized risk guardrails and a new discipline around risk management.

Source: CoinTelegraph