In the cryptocurrency market, stablecoins are seen as a "bridge" connecting traditional finance and the Web3 world, promising value stability. However, a recent series of cascading failures of stablecoins has sounded alarm bells, completely overturning people's understanding of "stability." Following the brief decoupling of the world's third-largest stablecoin, USDe, Elixir's deUSD and Stable Labs' USDX also faced significant decoupling, triggering market panic and a chain reaction. These events not only exposed the inherent fragility of the high-yield mechanisms of synthetic stablecoins but also revealed the fatal risks of high-leverage strategies in DeFi and complex synthetic assets in highly volatile markets. When the promise of "stability" collapses under pressure, what will be the future path of Web3 finance?
- deUSD Decoupling: Chain Reaction Triggered by Stream Finance's Collapse
Elixir's synthetic dollar stablecoin, deUSD, aims to provide a "truly decentralized" non-custodial alternative to Ethena Labs' USDe. However, its fate is closely tied to the collapse of the DeFi protocol Stream Finance.
Stream Finance Collapse: On November 4, the DeFi protocol Stream Finance paused withdrawals after an external fund manager disclosed a loss of $93 million. The protocol owes at least $285 million to multiple lending institutions, including over $68 million owed to Elixir.
deUSD Trading Halted: Due to losses caused by Stream Finance's liquidation operations, Elixir decided to halt trading of its synthetic dollar stablecoin, deUSD.
Redemption Commitment: Elixir stated that it has processed redemptions for 80% of deUSD holders and has taken a snapshot of the remaining balances, which can be exchanged for USDC at a 1:1 ratio when the claims portal opens. Although Elixir closed the minting/redemption infrastructure for deUSD on Thursday, it still plans to redeem 100% of deUSD holdings at a 1:1 ratio.
Accountability: Elixir pointed out that it is the only creditor with "full $1 redemption rights" from Stream, but Stream reportedly "has decided not to repay or liquidate." Currently, Stream holds about 90% of the deUSD supply (approximately $75 million), and a significant portion of the remaining support held by Elixir consists of loans provided by Morpho to Stream. The Elixir team is working with other decentralized lending platforms such as Euler, Morpho, and Compound, as well as treasury management institutions, to liquidate its positions in Stream and distribute the funds to deUSD holders.
- USDX Crash: Failure of Delta Neutral Hedging Strategy
The synthetic stablecoin USDX issued by Stable Labs also experienced significant decoupling, with its price dropping below $0.60, raising concerns about potential chain reactions affecting its integrated protocols.
Price Plunge: USDX's historical circulation reached as high as $683 million, but its current trading price has fallen below $0.60.
Failure of Delta Neutral Hedging Strategy: USDX uses a so-called delta neutral hedging strategy provided by exchanges to maintain its pegged exchange rate. The cause of its decoupling is still unclear, but it may be related to the $128 million attack on Balancer on November 3. The forced liquidation of Stable Labs' BTC/ETH short positions may have led to a surge in redemptions, causing the USDX exchange rate to drop.
Portfolio Management Issues: Hyperithm researcher Min pointed out that USDX's "portfolio has not changed for over two months," and at one point included strange alternative investments like BANANA31, questioning whether it was being actively managed.
Whale Sell-off: Another trader, Arabe ₿luechip on X, claimed that wallets associated with Stable Labs and Babel Finance founder Flex Yang began releasing USDX collateral earlier this week to exchange for alternative stablecoins like USDC, USDT, and Trump-backed USD1 on protocols such as Euler, Lista, and Silo.
Chain Reaction: On-chain lending protocol Lista DAO and Binance-supported decentralized exchange PancakeSwap have issued preliminary statements indicating they are closely monitoring developments or working to mitigate risks. Lista has begun liquidating its USDX/USD1 treasury with assistance from Re7 Labs, which established the treasury. In announcing an emergency vote, Lista stated, "This move aims to minimize potential losses and maintain a healthy market environment for the entire ecosystem." The protocol executed a flash loan, liquidating over 3.5 million USDX and recovering over 2.9 million USD1 tokens.
- Deep Reasons Behind the Stablecoin Cascading Failures: Fatal Fragility Behind High Yields
The cascading failures of synthetic stablecoins like USDe, deUSD, and USDX reveal the fatal fragility behind the high-yield myth of DeFi.
Mechanism Temptation and Risks: These stablecoins often offer yields far exceeding those of traditional finance through complex mechanism designs, attracting a large influx of funds. However, these mechanisms often rely on strategies such as derivatives hedging and funding rate arbitrage, whose stability faces enormous challenges in highly volatile markets.
Leverage Amplifying Risks: High-leverage strategies such as circular lending, prevalent in DeFi, infinitely amplify market risks. Once the prices of underlying assets fluctuate violently or hedging strategies fail, it will trigger large-scale liquidations and chain reactions.
Liquidity and Trust Crisis: In situations of market panic and sudden liquidity reduction, the anchoring mechanisms of stablecoins will suffer substantial impacts, potentially leading to "run-like" bank runs, evolving from technical risks into liquidity and trust crises.
Poor Portfolio Management: Some stablecoin projects have issues with portfolio management, failing to engage in active management and even investing in high-risk alternative assets, further exacerbating the risk of decoupling.
- Market Insights: Re-examining the Nature and Risks of Stablecoins
The series of stablecoin failures has once again prompted a profound reflection on the nature and risks of stablecoins in the market.
Definition of "Stability": The "stability" of stablecoins depends on market liquidity, the effectiveness of hedging strategies, and the operational norms of the issuer, rather than a simple 1:1 reserve. Once the market becomes unstable, it is more fragile than any asset.
Transparency and Compliance: This incident also emphasizes the importance of transparency in reserves, portfolio management, and compliance for stablecoin issuers.
Investor Education: For investors, it is crucial to fully understand the operational mechanisms and potential risks of synthetic stablecoins, to be wary of high-yield temptations, to invest rationally, and to avoid blindly following trends.
Conclusion:
The series of stablecoin failures represents another significant test faced by the cryptocurrency market recently. It not only reveals the fatal fragility behind the high-yield myth of synthetic stablecoins but also warns of the potentially devastating consequences of high-leverage strategies in DeFi. Although project teams and exchanges are attempting to respond to the crisis through compensation and risk control upgrades, this "bloodbath" serves as a reminder to all market participants: while pursuing high yields, one must fully recognize the inherent risks of the crypto market. The nature of stablecoins, the risks of leverage, and the responsibilities of platforms and investors will all be re-examined in the wake of this incident.
Related Reading: Wall Street's "Great Retreat" Triggers $2 Billion Liquidation, Is the Bitcoin (BTC) Bull Market Ending or Is It the Dawn Before the Night?
Original Article: “Stablecoin Meltdown! deUSD and USDX Lose Their Pegs, Is the DeFi High Yield Myth Collapsing?”
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