We analyze how blockchain-based financing affects capital allocation to provide early guidance for DeFi regulation. Competition with conventional financial firms raises borrowing costs, incentivizing DeFi firms to shirk their responsibility for managing investors’ funds. While blockchain technology enables collective monitoring, enhancing it without prudential regulation creates gambling dynamics: DeFi firms bet on evading detection when shirking, while investors bet on enforcing responsible behavior to secure higher repayments. Although an equilibrium exists where DeFi firms behave responsibly, it becomes less stable when investors are overly confident in coordinated monitoring, particularly in response to out-of-equilibrium offers with unexpectedly high shirk-inducing repayments.