DeFi for RIAs: the due-diligence guide to asset, protocol, chain, and custody

What DeFi is

Decentralized finance is lending, borrowing, trading, and asset management performed by software deployed to a blockchain. A lending protocol can match suppliers of capital with overcollateralized borrowers without a bank operating the ledger. The rules are visible in code and transactions settle on-chain.

Code on a blockchain can still be unsafe, partly centralized, or wrong for a client. A USDC lending position, for example, combines an issuer-controlled dollar token, an upgradeable lending protocol, a price oracle, a settlement chain, and whatever wallet signs for the client. Each of those can fail in its own way.

The mechanics of the flagship case, overcollateralized lending, fit in a paragraph. A supplier deposits USDC into a pooled market contract and receives a receipt token that grows with interest. A borrower posts collateral worth more than the loan and pays a floating rate set by utilization: the more of the pool that is lent out, the higher the rate climbs, which draws new suppliers and pushes borrowers to repay. If the collateral’s value falls toward the loan’s value, any third party may repay the debt and take the collateral at a discount. Suppliers rely on that liquidation where a bank would rely on a credit officer. Every step is a contract call recorded on the chain, which is why the diligence questions can be answered at all.

Client demand

One in four American adults owns crypto, about 67 million people, according to the National Cryptocurrency Association’s 2026 State of Crypto Holders Report, run with The Harris Poll and published 2026-05-21.¹ In the Bitwise/VettaFi 2026 Benchmark Survey, 32% of advisors said they allocated to crypto in client accounts in 2025, up from 22% in 2024, and advisors said 74% of their clients invested in crypto outside the advisory relationship, up from 71%.²

A held-away position is unadvised risk inside a household the advisor already serves: unknown wallets, unknown protocols, no diligence file, no position limit. The rest of this guide shows how to diligence such a position, one layer at a time.

The four-layer test

Test every position at four layers. Each layer answers the same question, who can change or stop this, about a different part of the stack.

1. Asset: What does the client legally and economically own? Who can freeze, redeem, dilute, or change it?
2. Protocol: Which contracts hold the asset? Who can upgrade or pause them? Which oracles, bridges, curators, and governance votes can change the terms?
3. Chain: Who orders transactions? Can the chain halt? Who controls upgrades, and the bridges in and out?
4. Custody: Who holds the keys that sign for the position, how many must agree, and what do they check before they sign?

The layers fail independently, and each has a recent failure with a name and a number. The asset: in March 2023 USDC, a fully reserved dollar token, traded as low as 86 cents because $3.3 billion of its reserves sat in a failed bank over a weekend.³ The protocol: in March 2023 an attacker took about $197 million from Euler Finance through a function a governance upgrade had added the summer before.⁴⁵ The chain: in August 2022 an upgrade to the Nomad bridge made every message look valid, and more than $190 million left.⁶ The custody: in February 2025 Bybit’s signers approved a transfer that looked routine and handed over about $1.5 billion.⁷ The sections below take each layer in turn.

The test, applied to one position

Take a client supplying USDC to a lending protocol on Ethereum from a wallet the client controls.

The asset. USDC is issuer-controlled. Circle administers the token contracts, can block addresses, and stands behind the redemption path the client’s dollar claim runs through. Record it in the client file; the USDC control profile lists each of these powers.

The protocol. The lending market is a set of upgradeable contracts. Someone holds the upgrade key, someone sets collateral parameters, and an oracle feeds it prices. Name each of them in the file.

The chain. On Ethereum no single operator can halt settlement or reorder transactions by decision. The same position on Base reads differently: Coinbase, one regulated US company, runs the only sequencer, and admin keys can upgrade the bridge contracts within about seven days.

The custody. The client’s wallet signs every deposit and withdrawal. If a phishing page or a compromised device gets a signature, no layer above it helps.

The weakest of the four layers sets the risk of the position. Here it is the asset or the custody, depending on how the client signs. Some positions fail at the first layer. Binance Staked ETH appears in DeFi dashboards next to non-custodial staking tokens, but the asset question settles it: the token is a claim on a centralized exchange, wrapped so that it moves on-chain. Ketju does not approve it, on that finding alone.

Where the yield comes from

Yield is compensation paid by someone or created by some mechanism. Lending yield comes from borrowers. Staking yield comes from protocol issuance and transaction fees. Tokenized Treasury yield comes from the underlying government securities, less fees. Private-credit yield pays the lender for borrower and recovery risk. Reward-token yield is often a temporary subsidy paid in the protocol’s own token.

Naming the payer matters more than comparing the percentage. Two positions showing 5% may carry different duration, liquidity, credit, contract, and control risks. Maple Finance is Ketju’s clearest published case. It screened near 5%, a modest premium over collateralized lending, and the premium paid for undercollateralized loans to institutions, which carry borrower risk that collateralized lending does not. Ketju’s Maple memo gives the whole case.

Protocol layer: smart-contract risk

“Audited” means that one firm reviewed one version of some code, within a stated scope, on a stated date. The diligence question is whether the code that holds the client’s money was inside that scope.

The Euler Finance attack shows the gap. On 2023-03-13 an attacker used a donation function that a governance proposal, eIP-14, had added to the protocol. The function let an account give away its collateral without a health check, so the account’s debt stayed while the collateral behind it disappeared.⁵ About $197 million left the protocol.⁴ Euler had been audited. The firm that reviewed eIP-14, Omniscia, has said in writing that its audit covered only the upgrade’s Chainlink price integration, and that the donation function “was never in scope of any audit conducted by our team.” A second firm, Sherlock, had reviewed the function in July 2022.⁵ Euler recovered the funds after three weeks of talks with the attacker, an outcome its own account calls almost unheard of in crypto.⁴ An advisor could not have found the bug, but could have asked which audit covered the newest code and insisted on a precise answer.

Start by recording the exact code path: the deployed contract addresses, the network, the implementation behind any proxy, the market or vault, and every contract the deposit and withdrawal touch. One protocol brand often holds several products with different code and different administrators. For each audit, record the firm, date, commit, scope, exclusions, findings, fixes, and whether the deployed code matches the code reviewed.

Then record who can change the code, and how fast:

• the administrator of any upgradeable proxy;
• pause and emergency powers, and who holds them;
• the governance thresholds for proposing and executing a change;
• timelocks and security councils, and how long a holder has to leave before a change takes effect;
• whoever sets oracle sources and collateral parameters;
• the configuration of any bridge the asset depends on;
• the front end and API the client actually uses.

Nobody can repair an immutable protocol, and nobody can change its terms. An upgradeable protocol can be repaired, and whoever holds the upgrade key can also change its terms. Either can suit a client. Record who holds each power.

Kelp’s 2026 loss came from a configuration setting in a bridge. On 2026-04-18 a forged cross-chain message released 116,500 rsETH, worth about $292 million, from Kelp’s LayerZero adapter on Ethereum with no matching burn on the other chain.⁸⁹ LayerZero’s final report found that the application owner had replaced a two-of-two verification setup with a single verifier; a compromise of LayerZero’s internal RPC infrastructure, plus a denial-of-service attack on a third-party one, was then enough.⁹ Kelp’s restaking contracts were never exploited. For any wrapped or bridged asset, the bridge and its configuration are part of the asset’s security, and they are usually the least examined part of the stack. Ketju’s Kelp memo has the full account.

Chain layer: who orders transactions, and the bridges

A chain’s validators or sequencer decide whether a transaction happens at all, and in what order. On Ethereum a permissionless set of validators proposes blocks, and no single party can refuse a transaction for long. On most layer-two networks one company runs the sequencer that orders every transaction, and a small group of key holders can upgrade the bridge that holds deposits from Ethereum. The Atlas records these facts chain by chain: who runs the sequencer, whether users can force a transaction through if it stops, and who can upgrade what.

Bridges are where the chain layer has failed most. On 2022-08-01 an upgrade to the Nomad bridge set the value of trusted roots to 0x00. That value also matches an untrusted root, so every message was treated as proven.⁶ More than $190 million left, much of it through copycats who replayed the first attacker’s transaction with their own address; no technical skill was needed.⁶ Both chains kept running throughout; only the bridge failed. A client holding a bridged token holds the bridge’s risk, whether or not the client ever used the bridge.

Liquidity at client size

Total value locked says how much is in a protocol. It does not say how much a client can withdraw, redeem, or sell at a fair price.

In a pooled lending market the rate a supplier earns follows utilization, the share of the pool lent out. Aave v3 sets rates on two slopes around an optimal utilization point: below it, borrow rates rise gently; above it, they rise much faster, and suppliers are paid from that borrower interest.¹⁰ The steep slope exists to draw new deposits and push borrowers to repay when the pool runs low. It also means a high rate is often the sign of a pool that is nearly empty, and a supplier cannot withdraw from an empty pool until borrowers repay or new money arrives. Record the rate and the withdrawable balance together, and test a withdrawal larger than one client’s position.

Size the position against what the client can withdraw or sell. A venue can be large in total while the particular asset, chain, vault, or maturity is too small for the intended position. Then test each way out, in order: a normal withdrawal at today’s utilization; a withdrawal after utilization rises; a market sale with measured slippage; issuer redemption with its gates and cutoffs; and a withdrawal or sale during a chain halt, a pause, an oracle failure, or a depeg. Mark which way out the contract guarantees, which depends on the code working, and which depends on a buyer.

The sale price depends on the venue. On 2025-10-10, in a market fall that took about $850 billion off total crypto value, USDe traded as low as 0.65 USDT on Binance and 0.92 on Bybit. Pools on Curve, Uniswap, and Fluid held near 0.99, and Ethena settled about $1.9 billion of redemptions, around 13% of supply, over two days.¹¹ Binance’s price came from an internal oracle that read only its own order book. A client who sold on Binance at the low lost about a third of the position, while the same token held near 0.99 on Curve and Ethena kept paying redemptions.

Some limits on selling or redeeming are written into the documents. Convex locks CRV permanently when it mints cvxCRV, and there is no redemption back; the only way out is a market sale at whatever discount prevails, and the discount is widest when most holders want to sell.¹² Not approved. USD.AI pays sUSDai holders out through 30-day redemption windows; in a rush, every holder waits in the same queue.¹³ Not approved; the memo is published. Concrete’s vaults add delayed withdrawals on top of whatever the underlying strategies impose; Ketju’s memo is published. Each of these terms was in the documents before any client lost money, and an advisor can read them in an afternoon.

Watch the warning signs after the position is on: available liquidity, utilization, market depth, redemption queues, depeg size and duration, bridge inventory, withdrawal fees, and governance changes. A rising yield paired with falling liquidity usually means the pool is running short of cash to pay withdrawals.

Custody layer: keys, signers, and approvals

A key authorizes transactions, but control is spread across parties and contracts. Record who can sign, recover, rotate, delegate, upgrade, pause, freeze, or redeem. List each power on its own; the one word “custody” covers several of them.

For a registered adviser the legal floor is the custody rule, Rule 206(4)-2 under the Advisers Act. An adviser with custody of client funds or securities must keep them with a qualified custodian: a bank or savings association, a registered broker-dealer, a futures commission merchant in limited cases, or a qualifying foreign institution, in an account under the client’s name or under the adviser’s name as agent or trustee.¹⁴ On 2025-09-30 SEC staff said they would not recommend enforcement against an adviser that treats a state-chartered trust company as a “bank” for crypto assets, if the adviser does annual diligence on it, holds a written agreement that bars lending or rehypothecating the assets without the client’s consent, discloses the material risks, and finds the arrangement in the client’s best interest.¹⁵ The letter is staff relief, and the rule itself is unchanged. On 2026-09-14 Chairman Atkins said he had asked staff for a proposal that would allow adviser self-custody under conditions, “because for too many assets a qualified third-party custodian simply does not exist yet.”¹⁶ No proposal had been published when this guide was reviewed; Ketju’s regulation page will list it when one is.

A signing threshold protects holders only when different people hold the keys. Ronin’s bridge needed five of nine validator signatures. On 2022-03-23 an attacker held five: four run by Sky Mavis, and one run by Axie DAO, which had allowlisted Sky Mavis to sign on its behalf in November 2021 to handle a surge of free transactions. That arrangement ended in December 2021, but the allowlist was never revoked. The attacker drained 173,600 ETH and 25.5 million USDC. Nobody noticed for six days, until a user could not withdraw 5,000 ETH.¹⁷ One company, Sky Mavis, could produce five of the nine signatures.

How signers check a transaction matters as much as who holds the keys. On 2025-02-21 Bybit moved funds from an Ethereum multisig cold wallet to a warm wallet, a routine transfer.¹⁸ Its forensic review found that the credentials of a developer at Safe, the wallet software provider, had been compromised, which let the attacker “deceive signers into approving a malicious transaction.”¹⁹ The transaction changed the cold wallet’s contract logic, and 401,347 ETH plus staked ETH, $1.46 billion in Bybit’s own count, left the wallet.¹⁸ The FBI attributed the theft to North Korea and put it at about $1.5 billion.⁷ The attacker never held the keys: Bybit’s own signers approved the transaction, deceived about what it did. Record how a transaction is checked before signing: whether signers decode the raw transaction on a separate device, whether it is simulated, address allowlists, dollar limits, who can stop a transfer in progress, and who is called when something looks wrong.

For a wrapped asset, the custody that matters is whoever holds the underlying asset. Three tokens trade as Bitcoin, and they differ in who holds the Bitcoin. WBTC is one custodian’s IOU: only approved merchants mint or redeem it. In August 2024 BitGo announced that WBTC custody would move to a joint venture with BiT Global, a custody firm registered in Hong Kong as a trust and company service provider, with BitGo as a minority shareholder and operations spread to Hong Kong and Singapore within 60 days.²⁰ The client’s wallet did not change and neither did the token contract; the party holding the Bitcoin did. Ketju’s WBTC memo describes the structure after the move. cbBTC is one issuer: Coinbase holds the Bitcoin and can freeze the token. Lombard’s LBTC spreads authority across a 14-member consortium that must reach a two-thirds threshold to authorize deposits, mints, burns, and payouts.²¹ That spreads control wider, but the 14 members are still named institutions, and Babylon slashing adds another way for holders to lose money. Ketju’s LBTC memo weighs those risks apart from the reward rate. The Atlas pages list who controls each wrapper.

Checklist

A protocol audit is one input. The checklist below connects the client’s legal and economic exposure to every technical and operational dependency. Each step settled one of Ketju’s published cases.

1. Define the position.

• Name the exact token, contract, chain, protocol, market, and strategy.
• State the economic exposure and who pays the return.
• Identify the legal claim, the issuer or counterparty, or the lack of one.
• Record who may hold it and where.

Defining the position settled USD.AI. Written down plainly, the synthetic dollar is non-recourse lending against depreciating GPU hardware, with a 30-day redemption queue. Not approved.

2. List every party that can change the position.

• Asset issuer, collateral, redemption, and freeze authority
• Protocol contracts, upgrades, pauses, governance, and audits
• Oracles, bridges, curators, keepers, relayers, and front ends
• Chain liveness, transaction ordering, validators, and upgrade control
• Wallet, custodian, signers, recovery, and the transaction-approval workflow

Listing the parties settled Kelp’s rsETH. The staking logic was sound, but the cross-chain bridge trusted one verifier, and it released about 116,500 unbacked tokens in April 2026. Not approved.

3. Test losses, withdrawals, and sales.

• Past exploits, bad debt, depegs, halts, and governance failures
• Withdrawable liquidity at client size, measured apart from total value locked
• Redemption gates, queues, market depth, fees, and settlement delay
• What happens if the oracle, bridge, collateral, issuer, or keys fail
• The recovery path, and who is responsible for it

Testing the way out settled Convex. Converting CRV to cvxCRV is one-way, and the only way out is a market sale at whatever discount prevails. Not approved.

4. Write the decision so it can be checked.

• The research finding and its reasons, kept apart from the client decision
• Whether this household and this account type may hold it
• The client’s position limit and the amount the advisor chose
• Observable events that start a new review, with a data source for each
• A named owner, a next review date, and an evidence archive
• A risk statement in the client’s language, and the suitability rationale
• A version history for corrections and changed decisions

Every Ketju memo, approved or not, lists the observable events that would start a new review, and a scheduled next review date.

The client file

Aim for a decision someone else can reproduce: the evidence, the limits, the owner, and the conditions that would reverse it, still visible after the market changes. Record what you decline as fully as what you approve; the declined cases show that you examined each choice before ranking them.

The decision header names the exact instrument, token, contract, protocol, market, and chain; the research finding and the verdict; whether this household and account may hold it; what the advisor chose and how much; and the reviewer, approval date, next review, and version.

The evidence body covers the economic exposure and who pays the return; the legal claim, issuer, redemption, and eligibility; the asset, protocol, chain, oracle, bridge, and custody dependencies; fees, liquidity, valuation, tax, and the operating workflow; and the incidents, counterevidence, open questions, and source archive.

Review conditions are observable facts that start a new review: an exploit above a stated size, an admin change, a new collateral type, liquidity below a stated level for a stated number of hours, a depeg past a stated depth and duration, a shortened timelock, a regulatory restriction, an issuer change, or a missed disclosure. Define the threshold, the layer it touches, and the data source when the condition is adopted. Choose conditions that a daily data check can confirm.

Corrections stay in the file. Keep the prior decision as it was written. State what the earlier version claimed, why it was incomplete or wrong, what evidence changed, and what changed in the finding, the eligibility, the selection, or the limit.

Ketju publishes each of these elements. The BUIDL memo approves BUIDL with limits and records, separately, that a typical advisory client does not qualify to hold it: BUIDL is a private fund offered to qualified purchasers under Rule 506(c) and the Investment Company Act §3(c)(7) exemption, with a $5 million initial minimum and transfers only between whitelisted wallets.²² It carries a version number, a review date, a next review, and the review condition written down at decision time: Ketju will review it again if a retail or accredited share class ships. A regulator, a client, or a colleague reading it two years from now can see what was decided, on what facts, and what would change it. Each memo on the Not approved list follows the same format, and so does every other current memo in the Ketju Register.

The last duty is monitoring, because a protocol keeps changing after a position is approved. Code upgrades, oracle changes, and new collateral types happen without asking the holder. Kelp’s rsETH had audits behind it when the forged bridge message arrived in April 2026; diligence written a quarter earlier described a system that no longer existed. Give each decision a review date and a named owner, so that someone checks it again on that date.