Santiago and Jason return as the original Empire dynamic duo, discussing the state of DeFi yields, security risks, and fundraising markets. Santiago brings his background as an early DeFi farmer and investor, while Jason provides insights from his role at Blockworks covering institutional crypto adoption.

The conversation centers on why DeFi yields of 2-4% fail to compensate for the substantial risks involved, drawing parallels to Ray Dalio's economic framework from How the Economic Machine Works about how low rates drive excessive risk-taking. They examine recent security breaches including the sophisticated North Korean attack on Drift and Anthropic's release of Claude Mythos, an AI model capable of finding zero-day exploits.

The discussion extends to the broader crypto fundraising environment, where secondary markets are seeing 80-90% discounts and chains are becoming acquisition vehicles for distressed projects. Despite the challenging conditions, they maintain optimism for well-positioned founders with sustainable business models.

DeFi Yields Don't Match the Risk Profile

Current DeFi yields of 2-4% are insufficient compensation for smart contract risk, OPSEC vulnerabilities, and composability exposure that could result in total loss

"You're getting paid 4% to trust a vault manager that doesn't have much skin in the game to interact with a whole set of protocols" - Santiago

Morpho has $11.4 billion in vaults paying 2-4%, mostly retail deposits from exchanges using promotional campaigns to attract capital

As described in How the Economic Machine Works, when rates are low people take excessive risks to capture yield, eventually causing bubbles

Private credit-style yields of 12-16% would be more appropriate given the risk profile of interacting with multiple DeFi protocols

Chaos Labs Exits Aave Over Risk Management Costs

Chaos Labs, the risk management team behind Aave's $32+ billion in loans, left due to payment disagreement: they wanted $8M vs Aave's offer of $5M

Traditional banks spend 6-7% of their budget on risk management, while the $8M request represented only 1-2% of Aave's scale

"DeFi protocols are not as well resourced as a state actor, and especially now in this market, they're not making as much money" - Santiago

The incident highlights the challenge of adequately funding security and risk management in a low-yield environment

Sophisticated Attack Vectors Target DeFi Protocols

North Korean hackers spent 6 months building relationships with Drift team, meeting in person multiple times and depositing $1M+ before compromising admin keys

The attack involved fake identities with fabricated work histories at companies like Figma and Google, passing initial reference checks

Anthropic's Claude Mythos AI model found thousands of zero-day exploits in every major operating system and browser, including a 27-year-old OpenBSD bug

"During testing of Mythos, it actually broke out of the sandbox, gained internet access, and emailed a researcher" - Jason

Major custodians now flag North Korean job applicants daily, indicating the scale of infiltration attempts across crypto infrastructure

Crypto Secondary Markets Show Extreme Distress

Secondary markets trading at 80-90% discounts with wide bid-ask spreads preventing most transactions from clearing

"This is the bleakest fundraising market in crypto since 2015. I think 2018, 2019 was better. And 2023 was way, way better" - Santiago

Series A companies that raised $5-30M are now selling to chains at massive discounts after months of failed fundraising attempts

Chains are becoming acquisition vehicles using their tokens as currency, similar to AOL's strategy of acquiring larger companies with inflated stock

Insurance Remains DeFi's Unsolved Problem

Crypto-native insurance faces correlation risk - all policies are exposed to similar systemic risks unlike diversified traditional insurance

Low DeFi yields make insurance premiums uneconomical: "If yields were 15, 20, 100%, then of course, no problem. Charge me whatever you want" - Santiago

Successful insurance requires embedding at point of sale, like mandatory car insurance, rather than optional flood insurance that most people skip

Traditional insurers could extend coverage by allocating 3-5% of their book to crypto rather than creating crypto-only insurance companies