1 billion USD stablecoin evaporates: What's the truth behind the chain reaction of DeFi explosions? - ChainCatcher

Author: Chloe, ChainCatcher

The market has yet to recover from the aftershocks of October 11, as another wave of DeFi domino effects unfolds.

According to Stablewatch data, yield-bearing stablecoins experienced the most severe capital outflows since the Terra UST collapse in 2022, totaling up to $1 billion over the past week. Among them, Stream Finance’s xUSD alone saw outflows of $411 million, acting as the catalyst. Surprisingly, this was not an isolated incident; this chain of liquidations has torn apart the fragile structure of the DeFi Lego stack.

Collateral values plummeted, utilization rates approached 100%, resulting in extreme negative returns

The crisis was triggered on November 3 when Stream Finance suddenly announced that external fund managers had incurred a trading loss of $93 million, followed by the freezing of all deposits and withdrawals. The price of xUSD collapsed from $1 to $0.43, with a market cap evaporating over $500 million, currently struggling around $0.11. The chain reaction instantly ignited, with Elixir’s deUSD being hit hardest. As Stream’s lending partner, it held a large amount of xUSD as collateral, which saw its value evaporate by 65%, approximately $68 million USDC.

Meanwhile, the hidden markets on lending platforms Morpho and Euler saw utilization rates soar to 95%–100%, with lending rates once hitting an abnormal -752%, indicating that collateral had become worthless. Compound quickly shut down some markets, and protocols like Silo and Treeve’s scUSD also followed suit.

Today, Elixir’s official Twitter announced that the stablecoin deUSD has officially been retired and is no longer worth anything. The platform will initiate a USDC payout process for all deUSD and its derivatives, such as sdeUSD. The affected parties include lenders, AMM LPs, Pendle LPs, and others. Elixir also warned users not to purchase or invest in deUSD through AMMs or other channels.

This is the first time in DeFi history that a protocol has proactively declared a stablecoin “dead,” saving holders’ principal but effectively ending the deUSD ecosystem. Elixir emphasized that the payout funds come from the protocol’s reserve and recovered assets from Stream, but did not disclose specific timelines or audit details. Market interpretations suggest that this move was a “tail-ending” strategy by the protocol to avoid legal risks.

( The root cause of Stream xUSD depegging on October 11

To understand the root of this storm, we need to trace back to the liquidation event on October 11. A deep analysis by Trading Strategy on November 5 on X pointed out that the fundamental reason for Stream xUSD depegging was not the Balancer hack but the failure of a delta-neutral strategy during the historic liquidation on October 11. Although Stream claimed to adopt a delta-neutral hedging strategy with spot and short positions in a 1:1 ratio, extreme volatility on October 11 caused the exchange to automatically reduce positions through ADL (Auto-Discharge-Liquidation), forcibly closing positions and breaking the original hedge balance. This led to a direct loss of principal for Stream, triggering the xUSD depegging.

Deeper issues include: severe lack of transparency (only $150 million out of $500 million TVL visible on-chain), high-risk off-chain trading strategies such as volatility selling, and over-leverage through recursive lending via Elixir. Further analysis indicates that Stream was just one of the first victims to surface. Given that October 11’s event was an unprecedented extreme liquidation, it is expected that more DeFi projects will face similar collapses in the future. Surprisingly, within just a few days, various DeFi protocols began to explode like dominoes.

) A billion dollars in stablecoin outflows is a major market warning

According to @cmdefi, DeFi operates in two modes: protocol-governed and permissionless independent lending. The former, like AAVE and Spark, requires governance voting for asset listing, with the platform responsible for backing; the latter, like Morpho and Euler, have each market managed independently by curators, often project teams or stakeholders.

The risk with curators is that they can set up pools and list various assets without platform backing. Issues like problems with stablecoins such as xUSD or underlying assets of certain stablecoin projects can lead to utilization rates soaring to 95%–100%, with high interest rates but no repayment because the collateral has become worthless. No matter how high the interest, it’s just digital numbers.

Additionally, Block先生 pointed out that this week’s DeFi incidents serve as a reminder that although “isolated lending markets” imply risk is confined within a specific pool or market, in reality, risks can still propagate through cross-dependencies, chain reactions, curators, borrowers, and structural issues, exposing assets to broader risks.

If Stream Finance’s collapse is a lesson, then the billion-dollar stablecoin outflows are a stark warning to the market. In DeFi, any risk can transmit downward through five or six layers, even crossing protocols and chains.

Furthermore, not all DeFi protocols’ asset allocations are visible on-chain. The domino effect in DeFi might not be over yet. For users, controlling risk must always be the top priority.