gm from the Day One Law team!

Today’s legal update examines the recent yETH exploit, which serves as a reminder that DeFi products carry failure modes that are increasingly complex and misunderstood by builders and users alike.

TLDR: DeFi architecture changes fast. Legal frameworks cannot remain static.

This post breaks down what happened, what it means for founders, investors, aggregator teams, and integrated protocols, and where legal drafting must move next.

What Happened With yETH

yETH suffered a catastrophic exploit after a math bug in its stableswap style contract allowed an infinite mint of yETH in a single transaction. This was not oracle manipulation or a flash loan trick. It was a structural collapse of the AMM math.

A missing division in the invariant formula allowed the attacker to mint an absurd quantity of yETH, approximately 2.35e38 tokens, which they immediately swapped for all of the pool’s real collateral. Roughly 11 million dollars in stETH, rETH, cbETH, and ETH was drained. About one thousand ETH was pushed through Tornado Cash. The remaining staked ETH derivatives sit in attacker controlled wallets. yETH is effectively unbacked.

Yearn confirmed the incident, paused the pool, and clarified that the affected contract was a standalone yPool, not a Yearn Vault V2 or V3 product. SEAL 911 and ChainSecurity are investigating. The failure mode mirrors other recent stableswap collapses. A single precision or invariant error can create a one transaction liquidity wipeout with no guardrails and no recourse.

The Legal Gap: Yearn’s Public Disclosures

On the legal side, as far as I can tell, Yearn does not publish a traditional Terms of Service specific to the dApp front end or to the yETH product. There is no formal user agreement that allocates liability, requires user acknowledgements, waives claims, limits warranties, establishes governing law, or dictates dispute processes.

What Yearn does publish is a general “Risks” page that warns users of the possibility of smart contract failure and loss of funds. These are high level disclosures. They are not contractual protections. They do not function as enforceable waivers or limitations under modern legal standards.

This gap is common among early DeFi protocols. It is not viable for modern structured products handling millions in collateral and interacting with complex dependency chains.

And the impact does not stop with Yearn.

Integrated Protocols Now Face Secondary Exposure

Many protocols use yETH or other Yearn assets as collateral or inputs in their own systems. Those protocols now face a secondary legal exposure. Their own users may look to them for recourse if positions are impaired or liquidations occur.

Whether these integrated protocols have contractually disclaimed liability for upstream protocol failures will now matter. If their Terms of Service are generic or absent, they may unintentionally become the deepest pocket simply because they are the last point of contact before the user.

This is not theoretical. It is how litigation and arbitration tend to unfold in other financial contexts. The claimant follows the chain of custody and looks for the entity closest to them with the clearest interface and the deepest balance sheet.

Impact on …

DeFi Aggregator Front Ends

The same concern applies to aggregator front ends, which often present unified user experiences without surfacing differentiated risk across underlying protocols.

If an aggregator routed users into yETH, and users relied on the aggregator presentation rather than protocol level documentation, the aggregator’s own legal framework becomes relevant. Ambiguity increases exposure.

Aggregator platforms need clear drafting on

• what they do and do not warrant

• whether they assume responsibility for failures within integrated protocols

• how user claims are treated when an integrated asset collapses

• how disclosures are surfaced and updated as integrations evolve

Aggregators like to position themselves as user interfaces only. Courts and regulators may not always agree with that framing if the drafting is unclear.

What builders must do

For builders, the governance burden here is practical. Your documents must reflect the real engineering risk surface, and the risks inherited from protocols you integrate.

That includes:

• dependency and cascade failure scenarios across LSTs, AMMs, wrappers, and collateral chains

• insolvency, depeg, illiquidity, or non redeemability events

• definitions of loss, bug, protocol insolvency, slashing, and emergency authority

• how user claims are treated if collateral is impaired

• how responsibility is allocated across DAOs, contributors, affiliates, and upgrade key holders

• how the legal terms update as the product and its integrations evolve

Products like these do not fail in generic ways. The legal frameworks cannot be generic either.

Why this matters

Incidents like this are why our firm invests time into mapping technical risks and translating them into clear, enforceable, and adaptable legal structures. This is the work we enjoy and the work clients rely on us for.

If you are building anything in this category, we can help you design legal frameworks that support speed, interoperability, and composability, while still protecting the protocol, the team, and the user base from predictable failure modes.

This is what we nerd out on. This is the fun part. And it is much easier to solve before a failure event than after.

If you want to discuss what this means for your protocol, your investors, or your integrated partners, reply to this email or reach out anytime.

Talk soon.

Nick Pullman
Day One Law