Imagine the shock of logging into your crypto portfolio only to see a supposedly rock-solid stablecoin tanking like a house of cards – that's the alarming reality hitting investors in the decentralized finance (DeFi) space right now. But here's where it gets controversial: Is this just a one-off blunder, or a symptom of deeper flaws in how DeFi handles trust and transparency? Let's dive into the details of this unfolding drama with Stream Finance, and you'll see why it's sparking heated debates among crypto enthusiasts. And this is the part most people miss – the ripple effects could reshape how we think about lending and borrowing in the digital economy.
In a nutshell:
- Stream Finance revealed that an outside fund manager had lost roughly $93 million belonging to users, leading to an instant halt on all withdrawals and deposits.
- The staked version of their stablecoin, Stream USD (known as xUSD), dropped sharply from its $1 anchor point, plummeting by about 77% in the wake of the news.
- A DeFi analysis team called Yields and More spotted almost $285 million in immediate debt risks spread out across various lending platforms.
Stream Finance broke the news late Monday, explaining that an external fund manager responsible for their assets had suffered a significant loss of approximately $93 million in user funds. This triggered a dramatic 77% plunge in the value of their main stablecoin, highlighting some serious weak spots in the web of interconnected lending within DeFi.
The protocol has put everything on hold – no more withdrawals or deposits for now – while they've brought in the law firm Perkins Coie to dig into what happened and figure out how to prioritize creditors.
"We're swiftly pulling out all our liquid assets and anticipate wrapping this up soon," Stream Finance posted on X.
Just yesterday, the external fund manager in charge of Stream's funds came forward about the roughly $93 million loss from Stream's asset pool.
As a result, Stream is moving ahead with hiring Keith Miller and Joseph Cutler from Perkins Coie LLP to conduct a thorough investigation...
— Stream Finance (@StreamDefi) November 4, 2025
"While we work to fully understand the extent and reasons behind the loss, we're temporarily pausing all withdrawals and deposits," the protocol stated. "Any deposits that are pending won't be going through at this moment."
This incident caused the staked Stream USD (xUSD) to lose its peg almost immediately, dropping to around $0.50, as reported by blockchain security experts at PeckShield. By the time of this writing, data from CoinGecko indicates xUSD is trading at a mere $0.26, marking a 77% decline over the last 24 hours.
To put this in perspective for newcomers, stablecoins are cryptocurrencies designed to maintain a steady value, often pegged to the US dollar, making them a safer bet for holding or transacting in the volatile crypto world. Think of them like a digital version of cash you can trust not to fluctuate wildly – until something like this happens.
Yields and More (YAM), a research group focused on DeFi, uncovered nearly $285 million in direct debt exposure across several lending protocols, such as Euler, Silo, Morpho, and Gearbox. The most affected creditors include curators like TelosC, Elixir, MEV Capital, and Varlamore.
"It's not clear yet how the settlement will play out between holders of xUSD, xBTC, and xETH and the lenders using these as collateral," YAM cautioned. Here, xBTC and xETH are Stream's special wrapped versions of Bitcoin and Ethereum that earn yield – basically, digital wrappers that let you earn interest on these assets while using them in lending markets. For those new to this, DeFi lending works like borrowing money against your crypto holdings, but in a decentralized way without banks involved.
They also pointed out that other stablecoins with indirect ties include Elixir's deUSD, which had loaned out 68 million USDC (a popular stablecoin backed by the US dollar) to Stream, making up 65% of its support, and Treeve's scUSD through intricate chains of rehypothecation.
To explain rehypothecation simply: Imagine lending your house as collateral for one loan, but then the borrower uses that same house as collateral for another loan, and so on. It creates a chain reaction where one problem can cause everything to collapse, like dominoes. In DeFi, this means assets get reused multiple times across platforms, amplifying risks – a great example is how a single default in one protocol can trigger losses in several others.
This breakdown follows a warning from an anonymous on-chain trader named “Cbb0fe,” who pointed out that Stream's blockchain data suggested xUSD's backing assets were only about $170 million, while borrowing had ballooned to $530 million, hitting a leverage ratio over 4 times through the protocol's "recursive looping" approach.
Decrypt reached out to both Stream Finance and Cbb0fe for their side of the story, but neither responded right away.
"Recursive looping involves a protocol using its own assets in a cycle to take advantage of differences in interest rates," Stream clarified in a recent post defending their method.
But here's where it gets controversial – things heated up when users found out Stream was supposedly building a secret "insurance fund" from their profits. A user going by chud.eth claimed the team was keeping a "60% undisclosed fee" that wasn't kept separate from the strategies it was meant to protect against.
Stream shot back that "these funds were always intended to serve as an insurance fund," referencing internal talks and updates to investors, but admitted they "haven't been as open as we could have about how the insurance fund operates." For beginners, this controversy highlights a big debate in crypto: Should platforms be required to disclose every detail of their operations to build trust, or does too much transparency slow innovation?
Elixir, Stream's biggest single lender, tweeted that they have "full rights to redeem at $1 per unit with Stream for their lending position" and are "starting to unwind their lending involvement."
"The reported $93M incident at Stream Finance serves as yet another reminder that risks in DeFi go far beyond just the smart contracts," said Deddy Lavid, co-founder and CEO of Cyvers, a blockchain security firm, in a comment to Decrypt. "Even with solid protocols, external fund managers, off-chain asset storage, and human judgment remain key vulnerabilities."
What do you think? Is this a wake-up call for stricter oversight in DeFi, or just the growing pains of a maturing industry? Could Stream's approach to insurance funds be a smart safety net or a sneaky way to cut corners? Share your opinions in the comments – I'd love to hear your take!
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