Protocol Faces Significant Financial Setback
An external fund manager overseeing Stream Finance's assets lost approximately $93 million in user funds, prompting the protocol to suspend all withdrawals and deposits on Monday. The protocol announced it has engaged law firm Perkins Coie to investigate the incident and determine creditor priorities.
Stream Finance stated it is actively withdrawing all liquid assets and expects this process to be completed in the near term. Until the protocol can fully assess the scope and causes of the loss, all withdrawals and deposits remain temporarily suspended, with pending deposits not being processed.
Stablecoin Depegs Following Loss
The loss caused Staked Stream USD (xUSD) to depeg immediately, with blockchain security firm PeckShield reporting the stablecoin rapidly plummeted to approximately $0.50. The token currently trades at just $0.26, representing a 77% drop over the past 24 hours.
Broader DeFi Exposure Identified
DeFi research group Yields and More identified nearly $285 million in direct debt exposure across multiple lending protocols. The exposure includes Euler, Silo, Morpho and Gearbox, with curators TelosC, Elixir, MEV Capital and Varlamore among the most exposed creditors.
The research group warned that it remains unclear how settlements will occur between xUSD, xBTC, and xETH holders and lenders against these tokens. Stream's xBTC and xETH are yield-bearing wrapped versions of Bitcoin and Ethereum that were used as collateral across DeFi lending markets.
Stablecoins with indirect exposure include Elixir's deUSD, which had lent $68 million in $USDC to Stream, representing 65% of its backing. Treeve's scUSD also faces exposure through complex rehypothecation chains, where collateral gets used multiple times across different lending platforms, creating a cascading effect.
Warning Signs and Protocol Mechanics
Anonymous on-chain trader Cbb0fe had warned days earlier that Stream's on-chain data reportedly showed xUSD's supporting assets at only approximately $170 million while borrowing reached $530 million. This created a leverage ratio exceeding 4x through the protocol's recursive looping strategy.
Stream explained in a recent post that recursive looping is when a protocol loops its own asset to capture a spread in interest rates. Controversy erupted when users discovered Stream had allegedly been accumulating an undisclosed insurance fund from profits, with pseudonymous user chud.eth accusing the team of allegedly retaining a 60% undisclosed fee.
Stream responded that the intention was for these funds to be used always as an insurance fund, citing internal communications and investor updates. The protocol acknowledged they have not been as transparent as they should have been on how the insurance fund works, while Elixir announced it has full redemption rights at $1 with Stream and is beginning the process of unwinding its lending position.