This article is from: @yq_acc

Translation | Odaily Planet Daily (@OdailyChina); Translator | Ethan (@ethanzhang_web3)

Editor’s Note: Every wave of DeFi prosperity carries a common illusion: as long as the returns are high enough, the mechanisms are new enough, and the strategies are “complex” enough, risks seem to disappear automatically. However, the series of explosions in November 2025 proved that complexity has never equated to safety, and high returns have never equated to capability. The collapse of xUSD, the devaluation of deUSD, the repeated failures of oracles, and the indiscriminate flight of on-chain assets all revealed the industry's most uncomfortable reality: the so-called “decentralized stability” is mostly just a facade. This article uses this chain of incidents as an entry point to attempt to re-examine the core logic that has been continuously overlooked over the past five years.

The following is the original content, translated by Odaily Planet Daily, enjoy~

The first two weeks of November 2025 exposed fundamental flaws in the DeFi space, which academia has been warning about for years. First, the collapse of Stream Finance's xUSD, followed by the devaluation of Elixir's deUSD and numerous other synthetic stablecoins, were not merely due to mismanagement. They revealed structural issues in the DeFi ecosystem regarding risk response, transparency, and the construction of trust mechanisms.

In the Stream Finance collapse, what I observed was not a complex exploitation of smart contract vulnerabilities in the traditional sense, nor was it an oracle manipulation attack. Instead, the more concerning situation was that under the guise of the term “decentralization,” there was a severe lack of basic financial transparency. When an external fund manager lost $93 million with almost no effective oversight, triggering $2.85 billion in cross-protocol chain risks; when the entire “stablecoin” ecosystem, despite maintaining a peg to its anchor asset, saw its TVL plummet by 40% to 50% within a week, we must acknowledge a basic fact about the current state of DeFi: this industry has not learned any lessons from the past.

More accurately, the current incentive mechanisms have three major issues: they reward those who ignore past lessons, punish those who adopt conservative strategies, and, when an inevitable crisis erupts, force the entire industry to bear the losses together. An old saying in finance is painfully validated here: “If you are unclear about where the returns come from, you are the source of someone else's returns.” When certain protocols promise an 18% return with undisclosed strategies, while mature lending markets yield only 3% to 5%, the true source of these high returns is actually the principal of the depositors.

The Operating Mechanism and Risk Transmission of Stream Finance

Stream Finance positions itself as a yield optimization protocol, offering an 18% APY on users' USDC deposits through its interest-bearing stablecoin xUSD. The protocol claims to employ strategies such as “delta-neutral trading” and “hedged market making,” terms that sound professional and complex, making it difficult for people to understand how they actually work. In comparison, at that time, the APY for USDC deposits in mature protocols like Aave was 4.8%, while Compound's yield was just above 3%. From a basic financial common sense perspective, one should remain vigilant in the face of a return rate three times higher than the market level, yet users still deposited hundreds of millions into the protocol. Before the collapse, the trading price of 1 xUSD was 1.23 USDC, reflecting its claimed compounded returns. xUSD claimed to manage assets peaking at $382 million, but DeFiLlama data showed its TVL peak was only $200 million, meaning over 60% of the assets claimed by the protocol were unverifiable off-chain holdings.

Yearn Finance developer Schlagonia revealed the actual operating mechanism of Stream after its collapse: it was essentially a systematic fraud disguised as financial engineering. Stream created uncollateralized synthetic assets through “circular borrowing,” with the specific process as follows:

1. Users deposit USDC, and Stream exchanges these USDC for USDT via CowSwap;
2. Using these USDT, it mints deUSD on the Elixir protocol (the reason for choosing Elixir was its high yield incentives);
3. The minted deUSD is cross-chained to blockchains like Avalanche and deposited in lending markets to lend out USDC, completing a cycle.

At this point, although the strategy involved complex cross-chain dependencies and had obvious risks, it still resembled a standard collateralized lending model. However, Stream did not stop there: it did not use the borrowed USDC merely to supplement collateral for more cycles, but instead re-minted xUSD through its StreamVault contract, leading to an xUSD supply far exceeding what the actual collateral could support. At that time, Stream only held $1.9 million in verifiable USDC collateral but minted $14.5 million in xUSD, creating synthetic assets at a scale 7.6 times the base reserves. This was essentially a “fractional reserve banking model without reserves,” lacking regulatory oversight and without a lender of last resort (referring to institutions that provide liquidity support in a crisis).

The circular dependency with Elixir further exacerbated the instability of the system. In the process of inflating the xUSD supply, Stream deposited $10 million USDT into Elixir, leading to an increase in deUSD supply; subsequently, Elixir exchanged these USDT for USDC and deposited them in Morpho's lending market. By early November, the USDC supply on the Morpho platform exceeded $70 million, with loans exceeding $65 million, and Elixir and Stream were the two dominant participants on the platform. Among them, Stream held about 90% of the total supply of deUSD (approximately $75 million), while Elixir's collateral primarily relied on loans from Stream via Morpho. These two stablecoins formed a “mutual collateralization” relationship, destined to collapse in sync. This “financial inbreeding” ultimately led to the fragility of the entire system.

Industry analyst CBB publicly pointed out these issues as early as October 28, writing: “The on-chain collateral for xUSD is about $170 million, yet it borrowed about $530 million from lending protocols, with a leverage ratio of 4.1 times, much of which is illiquid holdings. This is not yield farming, but high-risk speculation (degen gambling).” Moreover, Schlagonia had warned his team 172 days before the Stream collapse, stating, “It only takes five minutes to analyze its holdings to see that a collapse is inevitable.” These warnings were public, specific, and accurate, yet ignored by users chasing high returns, “curators” pursuing fee income, and protocols supporting the entire system. On November 4, Stream announced that an external fund manager had lost approximately $93 million in fund assets, and the platform immediately suspended all withdrawal functions. Unable to redeem, market panic quickly spread, and xUSD holders rushed to sell tokens in a thin liquidity secondary market. Within just a few hours, the price of xUSD plummeted by 77%, dropping to about $0.23. This stablecoin, which once promised “stability” and “high returns,” evaporated three-quarters of its value in a single trading day.

Risk Transmission from the Data Perspective

According to data from the DeFi research institution Yields and More (YAM), the direct debt risk exposure related to Stream across the entire ecosystem reached $285 million, distributed as follows:

• TelosC: Loans collateralized by Stream assets reached $123.64 million (the single largest “principal” risk exposure);
• Elixir Network: Borrowed $68 million through Morpho's private vault (accounting for 65% of deUSD collateral);
• MEV Capital: $25.42 million (of which about $650,000 became bad debt because when the actual market price of xUSD fell to $0.23, the oracle froze its price at $1.26);
• Varlamore: $19.17 million;
• Re7 Labs: Two vaults involved $14.65 million and $12.75 million respectively;
• Enclabs, Mithras, TiD, Invariant Group: all had smaller risk exposures.

In addition, the Euler protocol faces approximately $137 million in bad debts, with over $160 million in funds frozen across various protocols. Researchers pointed out that the above list is not exhaustive, warning that “more stablecoins/treasuries may be affected,” as the full extent of interconnected risk exposures remains unclear weeks after the initial collapse event. Elixir's deUSD concentrated 65% of its reserves to lend to Stream through the Morpho private vault, which led to deUSD plummeting 98% from $1 to $0.015 within 48 hours, making it the fastest declining mainstream stablecoin since the collapse of Terra UST in 2022. Elixir facilitated redemptions for about 80% of non-Stream deUSD holders (allowing redemptions at a rate of $1 for 1 USDC), thereby protecting most community users, but the cost of this protection was extremely high, ultimately borne by the Euler, Morpho, and Compound protocols. Subsequently, Elixir announced a complete termination of all stablecoin products, acknowledging that its trust foundation had been irreparably damaged. The broader market response indicated a systemic loss of confidence. According to data from Stablewatch, although most interest-bearing stablecoins maintained their peg to the dollar, their TVL still dropped by 40% to 50% within a week after the Stream collapse. This means that even protocols that did not fail and had no technical issues experienced an outflow of about $1 billion. As users could not distinguish between compliant projects and fraudulent ones, they ultimately chose to “exit en masse.” By early November, the total TVL in the DeFi space had decreased by $20 billion, with the market not reacting to the failure of specific protocols but pricing in the general risk transmission.

October 2025: A $60 Million Triggering a Chain Liquidation

Less than a month before the collapse of Stream Finance, the cryptocurrency market experienced a “non-market collapse” revealed by on-chain forensic analysis, which was a precise attack on known institutional vulnerabilities. From October 10 to 11, 2025, a timely $60 million market sell-off triggered oracle failures, leading to large-scale chain liquidations in the DeFi ecosystem. This was not a “liquidation due to reasonable impaired positions from excessive leverage,” but rather a result of institutional-level oracle design flaws, and the attack pattern was identical to those recorded and publicly disclosed since February 2020.

The attack began at 5:43 AM UTC on October 10: a $60 million sell-off of USDe occurred on the spot market of a single exchange. In a well-designed oracle system, the impact of such situations should be minimal, as the system would use multiple independent price sources and a time-weighted mechanism to guard against manipulation. However, the actual situation was that the involved oracle system adjusted the valuations of collateral (wBETH, BNSOL, USDe) in real-time based solely on the manipulated platform's spot price, triggering large-scale liquidations. The infrastructure was instantly overloaded: millions of liquidation requests flooded in simultaneously, exceeding the system's processing capacity; market makers were unable to quote buy prices due to API data feed interruptions and withdrawal queue stagnation; market liquidity evaporated instantly, creating a “self-reinforcing” vicious cycle of liquidation.

Attack Method and Precedents

The oracle “faithfully” reported the manipulated price from a single platform, while prices in all other markets remained stable. The main exchange showed a USDe price of $0.6567 and a wBETH price of $430, while the price deviations on other platforms were less than 30 basis points (0.3%), with minimal impact on the on-chain liquidity pools. As noted by Ethena founder Guy Young: “During the entire event, over $9 billion in on-demand stablecoin collateral was available for redemption,” proving that the underlying assets did not experience substantial impairment. However, the oracle still reported the manipulated price, and the system executed liquidations based on these prices, ultimately leading to a large number of positions being forcibly closed due to “valuations that did not exist in any other market.”

This attack pattern is identical to the incident faced by the Compound protocol in November 2020: at that time, DAI surged to $1.30 on the Coinbase Pro platform within an hour, while all other platforms traded at $1.00, ultimately leading to a liquidation of $89 million. In this incident, although the attacked platform changed, the essence of the vulnerability remained the same.

This attack method is completely consistent with the following historical events:

• February 2020 bZx incident: $980,000 stolen through Uniswap oracle manipulation;
• October 2020 Harvest Finance incident: $24 million stolen through Curve manipulation, triggering a $570 million run;
• October 2022 Mango Markets incident: $117 million stolen through multi-platform manipulation.

Between 2020 and 2022, there were 41 oracle manipulation attacks, resulting in losses of $403.2 million. However, the industry's response actions were slow and fragmented, with most platforms still using oracles that “over-rely on spot prices and lack redundancy.”

As the market scale expands, the importance of these historical lessons becomes increasingly prominent, with the “amplification effect” being a key reason: in the 2022 Mango Markets incident, $5 million in manipulation funds ultimately led to $117 million in losses, with a multiplication factor of 23; while in the October 2025 incident, $60 million in manipulation funds triggered a larger chain reaction. Notably, the attack pattern did not become more complex; the root of the problem lies in the fact that the underlying system retained the same fundamental vulnerabilities while expanding in scale.

Historical Patterns: Collapse Events from 2020 to 2025

The collapse of Stream Finance is neither the first nor the only case. The decentralized finance (DeFi) ecosystem has experienced multiple stablecoin collapse events, each exposing similar structural vulnerabilities. However, the entire industry continues to repeat the same mistakes, with the scale of collapses continually expanding. The recorded collapse events over the past five years exhibit highly consistent patterns: algorithmic stablecoins or partially collateralized stablecoins attract deposits by offering unsustainable high yields, which do not come from actual revenue but rely on token issuance or new user deposit subsidies; during protocol operations, excessive leverage and opaque true collateral ratios exist, along with circular dependencies where “Protocol A provides collateral for Protocol B, and Protocol B in turn provides collateral for Protocol A.” Once a sudden shock exposes its potential insolvency issues or subsidies become unsustainable, a run will erupt: users rush to exit, collateral values plummet, triggering chain liquidations, and the entire system collapses within days or even hours. Risks will also transmit to those protocols that accept the failed stablecoin as collateral or hold related positions within the ecosystem.

May 2022: Terra (UST/LUNA)

• Loss Scale: $45 billion in market value evaporated within three days.
• Mechanism Background: UST is an algorithmic stablecoin supported by LUNA through a “mint-burn” mechanism. Its Anchor protocol provided an unsustainable annual yield of 19.5% on UST deposits, with about 75% of UST deposited in this protocol for rewards. The entire system relied on continuous capital inflows to maintain its peg to the dollar.
• Trigger Event: On May 7, the Anchor protocol experienced $375 million in fund redemptions, leading to a massive sell-off of UST and causing it to lose its peg. Users exchanged UST for LUNA to exit, causing the supply of LUNA to surge from 346 million to over 6.5 trillion within three days, forming a “death spiral,” with both tokens ultimately dropping to nearly zero levels.
• Subsequent Impact: This collapse caused significant losses for many individual investors and led to the bankruptcy of several major cryptocurrency lending platforms, including Celsius, Three Arrows Capital, and Voyager Digital. Terra founder Do Kwon was arrested in March 2023 and faces multiple fraud charges.

June 2021: Iron Finance (IRON/TITAN)

• Loss Scale: TVL plummeted from $2 billion to nearly zero within 24 hours.
• Mechanism Background: IRON is a partially collateralized stablecoin, 75% backed by USDC and 25% by its native token TITAN. The protocol attracted deposits by offering an unsustainable “yield farming” incentive with annual percentage rates (APR) of up to 1700%.
• Trigger Event: When large holders began redeeming IRON for USDC, the sell-off pressure on TITAN created a “self-reinforcing” effect. The price of TITAN plummeted from $64 to $0.00000006, causing the collateral supporting IRON to become completely ineffective.
• Lessons Learned: In a stressed environment, partially collateralized models struggle to maintain stability; when the collateral token itself enters a “death spiral,” the arbitrage mechanism can completely fail under extreme pressure.

March 2023: USDC

• Depegging Situation: Due to $3.3 billion in reserves being trapped in the near-bankrupt Silicon Valley Bank, the price of USDC fell to $0.87, a 13% drop from its pegged price. For a “fully collateralized” fiat stablecoin that regularly issues asset proofs, this situation should have been “impossible.”
• Peg Restoration: USDC only regained its peg to the dollar after the Federal Deposit Insurance Corporation (FDIC) initiated a “systemic risk exception” mechanism, providing full guarantees for deposits at Silicon Valley Bank.
• Risk Transmission: This event triggered DAI to lose its peg (with USDC accounting for over 50% of DAI's collateral), leading to over 3,400 automatic liquidations on the Aave platform, totaling $24 million.
• Lessons Learned: Even well-intentioned, regulated stablecoins face collateral concentration risks and depend on the stability of traditional banking systems.

November 2025: Stream Finance (xUSD)

• Loss Scale: Direct losses of $93 million, with total related risk exposure in the entire ecosystem amounting to $285 million.
• Mechanism Background: Created uncollateralized synthetic assets through “circular lending” (the scale of synthetic assets is 7.6 times that of actual collateral); 70% of funds operated through opaque off-chain strategies managed by anonymous external fund managers, with no proof of reserves provided.
• Current Status: xUSD trading price remains in the range of $0.07 to $0.14 (down 87%-93% from the pegged price), with liquidity nearly exhausted; withdrawal functions indefinitely frozen; multiple lawsuits filed; Elixir protocol completely ceased operations; a wave of “interest-bearing stablecoin withdrawals” has emerged across the industry.

All cases exhibit common failure patterns, specifically as follows:

• Unsustainable High Yields: The promised returns of Terra (19.5% annual), Iron (1700% annual), and Stream (18% annual) are disconnected from actual revenue-generating capabilities.
• Circular Dependencies: UST and LUNA, IRON and TITAN, xUSD and deUSD all exhibit “mutually reinforcing failure patterns,” where the collapse of one party inevitably leads to the collapse of the other.
• Lack of Transparency: Terra concealed the subsidy costs of the Anchor protocol; Stream hid 70% of its operational activities off-chain; Tether has faced repeated scrutiny over the composition of its reserve assets.
• Partially Collateralized or Self-Issued Collateral: Relying on volatile assets or self-issued tokens as collateral can trigger a “death spiral” when the market is under pressure, as the value of collateral will significantly drop precisely when it is most needed to provide support.
• Oracle Manipulation: Frozen or manipulated price data can cause liquidation mechanisms to fail, turning “price discovery” into “trust discovery,” leading to the continuous accumulation of bad debts and ultimately resulting in systemic insolvency.

The conclusion is evident: stablecoins are not stable. They merely “appear stable before becoming unstable,” and the transition from stability to collapse can occur in just a few hours.

Oracle Failures and Infrastructure Collapse

At the onset of the Stream collapse, oracle issues immediately became apparent. When the actual market price of xUSD fell to $0.23, many lending protocols hard-coded the oracle price at $1.00 or higher in an attempt to avoid chain liquidations. Although this move aimed to maintain system stability, it resulted in a fundamental disconnect between “market reality” and “protocol behavior.” Notably, this price hard-coding was a deliberate policy choice rather than a technical failure.

Many protocols would avoid triggering liquidations during temporary fluctuations by “manually updating oracle prices.” However, when the price drop reflects “actual insolvency” rather than “short-term market pressure,” this practice can lead to catastrophic consequences.

Protocols face an intractable choice, with three mainstream response methods each having fatal flaws:

1. Using Real-Time Prices: As shown in the October 2025 event, this approach faces manipulation risks and chain liquidations during market fluctuations, with severe costs;
2. Using Delayed Prices or Time-Weighted Average Prices (TWAP): This cannot respond to actual insolvency situations, leading to the accumulation of bad debts. In the Stream event, for instance, the oracle showed an xUSD price of $1.26 while the actual price was only $0.23, resulting in $650,000 in bad debts for MEV Capital alone;
3. Using Manual Updates: This introduces centralization risks and subjective intervention space, potentially even covering up the fact of insolvency by freezing oracle prices.

All three methods have already caused losses amounting to hundreds of millions or even billions of dollars.

Infrastructure Capacity During Stress Periods

In October 2020, after Harvest Finance suffered a $24 million attack, users fled en masse, causing its TVL to plummet from $1 billion to $599 million. The lessons revealed by this event should have been very clear: oracle systems must consider infrastructure capacity during stress periods; liquidation mechanisms must set rate limits and circuit breakers; exchanges must have redundancy capacity to “handle ten times the normal load.”

However, the October 2025 event proved that even at the institutional level, this lesson has not been learned. When millions of accounts faced simultaneous liquidations, and billions of dollars in positions were forcibly closed within an hour, with order books rendered blank due to all buy orders being consumed and the system overloaded unable to generate new buy orders, the degree of infrastructure collapse was indistinguishable from the failure of the oracle.

Technical solutions have long existed but have never been implemented, primarily because these solutions would reduce system efficiency under normal circumstances, and the funds required could instead be converted into profits.

If you cannot identify the source of the profits, you are not earning profits; you are paying the costs for someone else's profits. This principle is not complex. However, hundreds of millions of dollars continue to be invested in “black box strategies,” simply because people prefer to believe comforting lies rather than uncomfortable truths. The next “Stream Finance” may very well be operating at this moment.

Stablecoins are not stable; DeFi is neither truly decentralized nor secure; unknown sources of income are not profits but “theft with a countdown.” These are not subjective opinions but empirically verified facts that have been proven at great cost.

The only question is: will we eventually take action based on known lessons? Or will we pay another $20 billion price to repeat the same mistakes? Historical experience suggests that the latter is more likely.

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