$1 billion outflow from stablecoins: A detailed look at the truth behind the DeFi collapse.

Author: Chloe, ChainCatcher

Before the market could recover from the aftershocks of October 11, the DeFi domino effect began to unfold once again.

According to Stablewatch data, yield-generating stablecoins experienced the most dramatic outflow of funds since the Terra UST crash in 2022, totaling $1 billion. Stream Finance's xUSD saw a separate outflow of $411 million, becoming the trigger. This wasn't an isolated incident; this chain reaction of liquidations tore apart the fragile structure of the DeFi Lego stack.

Extreme negative returns occurred when the value of collateral plummeted and utilization was close to 100%.

The crisis was sparked on November 3rd when Stream Finance suddenly announced that an external fund manager had lost $93 million in trading, immediately freezing all deposit and withdrawal functions. The price of xUSD plummeted from $1 to $0.43, wiping out over $500 million in market capitalization, and it is currently struggling around $0.11. The chain reaction was immediate, with Elixir's deUSD bearing the brunt. As a lending partner of Stream, it held a large amount of xUSD as collateral, resulting in a 65% loss in value, approximately 68 million USDC.

Meanwhile, the utilization rate of hidden markets on lending platforms Morpho and Euler surged to 95% to 100%, with lending rates reaching an abnormal low of -752%, indicating that collateral had become dead debt. Compound urgently shut down some markets, and protocols such as Silo and Treeve's scUSD also decoupled from the market.

Today, Elixir officially announced on Twitter that the stablecoin deUSD has been retired and no longer has any value. The platform will initiate a USDC compensation process for all holders of deUSD and its derivatives (such as sdeUSD). This includes lenders who hold collateral, AMM LPs, and Pendle LPs. Elixir also warned users not to purchase or invest in deUSD through AMMs or similar channels.

This marks the first time in DeFi history that a protocol has proactively announced the "euthanasia" of a stablecoin. While it preserved the principal of holders, it completely ended the deUSD ecosystem. Elixir emphasized that the compensation funds came from the protocol's reserves and assets recovered through Stream, but did not disclose a specific timeline or audit details. The market interprets this as a "cut-the-tails" move by the protocol to avoid legal risks.

The root cause of Stream xUSD unanchoring on October 11th

To understand the root cause of this storm, we must trace back to the liquidation event on October 11th. A deep dive into Trading Strategy on X on November 5th pointed out that the fundamental reason for Stream's xUSD de-pegging was not the Balancer hack, but rather the failure of its Delta-neutral strategy during the historic liquidation on the 11th. Although Stream claimed to use a Delta-neutral hedging strategy (a 1:1 allocation between spot and short positions), the exchange's automatic position reduction (ADL) system forcibly liquidated its positions during the extreme volatility of October 11th, disrupting the original hedging balance. This resulted in a direct loss of Stream's principal, thus triggering the xUSD de-pegging.

The underlying problems include: a severe lack of transparency (only $150 million/$500 million TVL are visible on-chain), high-risk off-chain trading strategies (including volatility selling strategies), and excessive leverage (recursive lending via Elixir). The analysis also points out that Stream is just the first batch of victims to surface, and given the unprecedented extreme liquidation event on October 11th, "more DeFi projects are expected to collapse for similar reasons." Unexpectedly, in just a few days, various DeFi protocols have exploded one after another like dominoes.

The outflow of billions of dollars from stablecoins is a major warning to the market.

According to @cmdefi's analysis, DeFi falls into two models: unified protocol governance and permissionless independent lending. The former, such as AAVE and Spark, requires governance voting for asset listing, with the platform providing a safety net; the latter, such as Morpho and Euler, has each marketplace independently managed by Curator, often comprised of project teams or stakeholders.

Curator's risk lies in its self-established pools, which can list various assets without any platform endorsement responsibility. "Issues like xUSD, or problems with the underlying structure of some stablecoin projects, can lead to utilization rates soaring to 95% to 100%, with investors defaulting on payments despite extremely high interest rates. This is because the collateral has become worthless, making it impossible to redeem the assets, and even the highest interest rates are just numbers."

In addition, Mr. Block pointed out that this week's DeFi events remind users that although the name "isolated lending markets" implies that the risk is limited to a certain pool/market, in reality, it may still be exposed to the risks of other assets due to cross-dependency, cascading infection, curator, borrower and structural issues.

If the Stream Finance collapse was a lesson, then the outflow of billions of dollars in stablecoin funds is definitely a warning to the market. In DeFi, any risk can spread down five or six layers, and even be transmitted across protocols and chains.

Furthermore, not all DeFi protocols have their asset allocations visible on the blockchain. The domino effect of DeFi events may not be over yet, and for users, risk control is absolutely the top priority.