November 13 2025
The recent Stream Finance revelations starkly demonstrate the fragility of decentralized finance (DeFi) ecosystems. A third-party fund manager lost an estimated $93 million in user assets, resulting in the immediate suspension of all withdrawal and deposit services. This event not only led to a significant drop in the Staked Stream USD (xUSD), which has suffered a 77% drop from its $1 peg, but also to broader unrest within the DeFi market.
With the suspension of transactions, the protocol has partnered with the renowned law firm Perkins Coie to thoroughly investigate this incident and determine the priority of creditors. Stream Finance's communication emphasizes that they are actively withdrawing all liquid assets, with the expectation that this process will be completed shortly. This paints a worrying picture of the situation: the protocol's ability to meet its obligations is under pressure.
Stream Finance's losses caused an abrupt depeg for xUSD, which quickly fell to around $0.50. By the time of this writing, the price had fallen to around $0.26, according to data from CoinGecko. It's important not to view this development solely as a numerical issue. The implications for investors include significant uncertainty and potential losses. This incident also casts a shadow over the broader stability of the lending protocols involved.
DeFi research firm Yields and More (YAM) has identified nearly $285 million in direct debt exposure across multiple lending protocols, including Euler, Silo, Morpho, and Gearbox. This highlights how the impact of a single failure can quickly spread, with conservators like TelosC, Elixir, MEV Capital, and Varlamore among the most exposed creditors. It is unclear how this situation will be resolved for holders of xUSD, xBTC, and xETH, which serve as collateral in DeFi loans.
A significant risk arises from the use of rehypothecation chains—a practice in which collateral is used multiple times across different lending platforms. This strategy can lead to cascading effects that threaten the stability of the entire market. In this specific situation, Elixir, the largest creditor, has reported that it has $68 million in USDC had loaned to Stream, accounting for 65% of his backing. This illustrates the far-reaching implications of this situation.
Concerns about Stream Finance's financial health were already present, with a recent warning from an anonymous on-chain trader highlighting the large discrepancy between xUSD's backing assets—approximately $170 million—and its total loans, which totaled $530 million. This excessive leverage, exceeding 4x due to the use of the "recursive looping" strategy, creates risks that cannot be ignored.
The controversy surrounding Stream Finance continues. Users have discovered that the protocol may have built an "insurance fund" of undisclosed profits. Criticism of the lack of transparency is inevitable in this context. A pseudonymous user, chud.eth, accused the team of maintaining a "60% undisclosed fee" that wasn't properly separated from the strategies it claimed to safeguard.
In the wake of these accusations, Stream responded by claiming the funds were intended to serve as an insurance fund. Despite its good intentions, it appears the execution is lacking and communication with investors is lacking.
Elixir, the largest single creditor, has since announced that it has "full buyback rights at $1" on its lending position and is beginning to unwind that position. This could be an indication of the seriousness of the situation and the need to act early to prevent further damage.
Deddy Lavid, co-founder and Chief Executive Officer of blockchain security firm Cyvers, put it aptly: “The $93 million incident at Stream Finance reminds us that operational risks go beyond just smart contracts. Even if protocols are secure, third-party fund managers, off-chain custodians, and human oversight remain critical vulnerabilities.”
How has the Stream Finance incident affected the DeFi market?
The losses at Stream Finance have not only led to the depeg of xUSD, but have also had a snowball effect across various lending protocols, with potential ramifications for the broader market.
What is rehypothecation and why is it risky?
Rehypothecation is the use of collateral across multiple platforms that can lead to a chain reaction of financial problems. This creates new risks when assets become inaccessible due to losses.
How important is transparency in DeFi protocols?
Transparency is crucial in DeFi. A lack of openness can lead to investor distrust and jeopardize the protocol's stability, as demonstrated by the situation with Stream Finance.
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