Decentralized Finance (DeFi) has faced another shock as Stream Finance’s stablecoin, Staked Stream USD (xUSD), plunged by 77% following the announcement that $93 million in user funds were lost by an external fund manager. This incident highlights critical vulnerabilities in DeFi’s ecosystem, raising concerns about operational risks beyond smart contracts.
What Happened?
Stream Finance publicly revealed that an external fund manager, entrusted with their reserves, lost $93 million. As a result, withdrawals and deposits have been immediately suspended across the platform while the law firm Perkins Coie has been appointed to investigate the issue.
“Until we fully assess the scope and causes of the loss, all withdrawals and deposits will remain temporarily suspended,” the company wrote on X (formerly Twitter). Pending deposits will also not be processed until further notice.
The Fallout of xUSD’s Collapse
The loss initiated a depegging of xUSD from its $1 value, crashing to approximately $0.50 shortly after the announcement. As of now, data provided by CoinGecko shows xUSD trading at a mere $0.26, a staggering 77% drop within 24 hours. Additional tokens in Stream’s ecosystem, such as xBTC and xETH, are also affected, creating ripple effects across lending protocols that depend on these tokens as collateral.
Research by Yields and More (YAM), a DeFi analytics group, reveals that approximately $285 million in direct debt exposure exists among creditors like Euler, Silo, Morpho, and Gearbox. Stablecoins indirectly exposed include Elixir’s deUSD and Treeve’s scUSD, both impacted through complex rehypothecation chains. These chains use the same collateral multiple times across lending platforms, often amplifying financial risks.
Warnings Ignored
Before the collapse, concerns around the protocol’s leverage ratio were raised by an anonymous DeFi trader. Allegedly, Stream Finance was using a “recursive looping” strategy, leveraging up to 4x its collateral through its own assets. This unsustainable model reportedly exposed xUSD to enormous vulnerabilities.
Further controversy erupted when it was revealed that Stream Finance had allegedly accumulated an undisclosed “insurance fund” from platform profits. The team later admitted the fund existed but clarified its intended purpose was to act as an insurance reserve. However, users criticized a lack of transparency surrounding its operations and allocation.
What’s Next for DeFi Investors?
This incident underscores fundamental challenges in DeFi, particularly where operational risks like fund management and off-chain custody exceed those of programmatic smart contracts. As Deddy Lavid, co-founder of blockchain security firm Cyvers, stated, “Even when smart contracts are secure, human and operational oversight remain critical weak points.”
For investors navigating the DeFi space, tools for better risk assessment are essential. Stablecoins remain an integral part of the DeFi ecosystem, but as this event demonstrates, consistent due diligence is necessary to avoid similar pitfalls. Authorities and communities should advocate for enhanced transparency, better fund management, and more robust operational controls within protocols.
Looking for Reliable Stablecoin Investments?
If you’re exploring alternatives to volatile DeFi tokens, consider looking into USDC by Circle, a stablecoin backed by fully transparent, audited reserves. Known for greater reliability, USDC can be a safer choice for investors seeking stability in a turbulent market.
This event has reinforced the need for more secure, stable investment strategies in the ever-expanding world of Web3 and DeFi.
