The world of stablecoins never lacks for drama, but it sorely lacks reverence for risk. In November, trouble struck again.
A so-called “stablecoin” named xUSD suffered a flash crash on November 4th, plummeting from $1 to $0.26. As of today, it continues to slide, having fallen to $0.12—an 88% evaporation of its market value.
The incident involved Stream Finance, a star project managing $500 million in assets.
They packaged their high-risk investment strategy as the stablecoin xUSD, touting it as “dollar-pegged with automatic interest,” essentially embedding investment returns within the product. As any investment strategy, it could never guarantee perpetual profits. On October 11th, during the crypto market’s massive crash, their off-chain trading strategy failed, resulting in a $93 million loss—approximately 660 million yuan. That sum could buy over forty 100-square-meter apartments within Beijing’s Second Ring Road.
One month later, Stream Finance announced the suspension of all deposits and withdrawals, and the xUSD price decoupled.
Panic spread rapidly. According to data from research firm Stablewatch, over $1 billion in funds fled various “yield-bearing stablecoins” within the following week. This equates to the entire deposit base of a medium-sized city commercial bank being completely withdrawn in a 7-day run.
Alarm bells rang throughout the entire DeFi wealth management market. In some protocols, borrowing rates soared to a staggering -752%, meaning collateral became worthless paper. No one would repay to redeem it, plunging the market into chaos.
All of this stemmed from a seemingly beautiful promise: stability coupled with high interest rates.
When the illusion of “stability” was shattered by a massive bearish candle, we must re-examine which stablecoins are truly stable, which are merely high-risk investments disguised as stablecoins, and why high-risk investments can now brazenly call themselves “stablecoins”?
The Emperor’s New Clothes
In the financial world, the most beautiful masks often conceal the sharpest fangs. Stream Finance and its stablecoin xUSD exemplify this.
It publicly claimed xUSD employed a “Delta-neutral strategy”—a complex term from professional trading circles, purportedly using intricate financial instruments to hedge market volatility risks. This sounded both secure and sophisticated. The narrative promised users steady returns regardless of market fluctuations.
Within mere months, it attracted a staggering $500 million in capital inflows. Yet beneath the surface, on-chain data analysts uncovered a flawed operational model.
First was extreme opacity. Of its claimed $500 million in assets, less than 30% could be verified on-chain. The remaining “Schrödinger’s $350 million” operated entirely in the shadows. No one knew what transpired within this black box until its collapse.
Second was its staggering leverage. Using only $170 million in genuine assets, the project leveraged repeated collateralization and borrowing across other DeFi protocols to secure $530 million in loans—achieving over 4x leverage.
What does this mean? You thought you were exchanging for a stably pegged “digital dollar,” dreaming of steady high yields of over ten percent annually. In reality, you bought LP shares in a 4x leveraged hedge fund—and 70% of that fund’s positions remained invisible to you.
Behind the illusion of “stability,” your money is engaged in ultra-high-frequency trading within the world’s largest digital casino.
This is precisely the most dangerous aspect of such “stablecoins.” They use the label of ‘stability’ to mask their true nature as “hedge funds.” They promise retail investors the security of bank savings, yet their underlying operations employ high-risk strategies only the most professional traders can master.
Deddy Lavid, CEO of blockchain security firm Cyvers, commented after the incident: “Even if the protocol itself is secure, external fund managers, off-chain custody, and human oversight remain critical vulnerabilities. Stream’s collapse wasn’t a code issue—it was a human issue.”
This observation hits the nail on the head. Stream Finance’s fundamental flaw lay in the project team’s deliberate packaging of an extremely complex, high-risk, and unregulated financial game into a seemingly accessible “stable wealth management product” accessible to ordinary people.
Domino Effect
If Stream Finance manufactured a bomb, then the Curator role within DeFi lending products became the courier for that bomb, ultimately triggering a widespread chain reaction.
In emerging lending protocols like Morpho and Euler, Curators serve as “fund managers.” Most are professional investment teams responsible for packaging complex DeFi strategies into “strategy vaults,” allowing ordinary users to deposit funds and reap returns with a single click—much like purchasing wealth management products on a banking app. Their primary income stems from performance fees extracted as a percentage of user returns.
In theory, they should serve as professional risk gatekeepers, helping users screen high-quality assets. However, the performance fee business model also creates an incentive for them to pursue high-risk assets. In the intensely competitive DeFi market, higher annualized yields attract more users and capital, leading to greater performance fees.
When Stream Finance emerged as an asset packaged as “stable yet high-yield,” it quickly became a coveted target for many Curators.
The Stream Finance incident exemplified this worst-case scenario. On-chain data tracking revealed that multiple prominent Curators—including MEV Capital, Re7 Labs, and TelosC—heavily allocated high-risk xUSD within their managed vaults on protocols like Euler and Morpho. TelosC alone held a staggering $123 million exposure.
More critically, this allocation was not an oversight. Evidence indicates that days before the incident, multiple industry KOLs and analysts publicly warned on social media about xUSD’s transparency and leverage risks. Yet these Curators, holding substantial funds and bearing primary responsibility for risk management, chose to ignore these warnings.
However, some Curators themselves were also victims of this packaged scam. K3 Capital is one such example. This Curator, managing millions of dollars in assets on the Euler protocol, lost $2 million in the explosion.
On November 7th, K3’s founder publicly spoke out in Euler’s Discord channel, revealing how they had been deceived.
Image source: DiscordThe story begins with another “stablecoin” project. Elixir is a project that issues the dividend-paying stablecoin deUSD, claiming to employ a “basis trading strategy.” It was precisely based on this promise that K3 allocated deUSD within its managed treasury.
However, in late October, without any approval from its Curators, Elixir unilaterally altered its investment strategy. It transferred approximately 68 million USDC to Stream Finance via Morpho, shifting from basis trading to nested wealth management.
These are fundamentally different products. Arbitrage trading involves direct investment in specific trading strategies with relatively controllable risks. Nesting wealth management, however, involves lending funds to another wealth management product, effectively layering additional risk on top of the original high-risk investment.
When Stream’s bad debts became public on November 3rd, K3 immediately contacted Elixir’s founder Philip Forte, demanding guarantees for a 1:1 liquidation of deUSD. Philip chose silence, offering no response whatsoever. Left with no alternative, K3 forcibly liquidated on November 4, retaining $2 million in deUSD. Elixir declared insolvency on November 6, proposing a solution where retail investors and liquidity pools could exchange deUSD for USDC at a 1:1 ratio. However, deUSD held in the Curator vault remained inaccessible, with Elixir demanding collective negotiation for its resolution.
K3 has now retained top U.S. attorneys to sue Elixir and Philip Forte for unauthorized contract alterations and false advertising. They seek compensation for reputational damage and demand the forced conversion of deUSD back to USDC.
When the gatekeepers themselves begin peddling risk, the fall of the entire fortress is merely a matter of time. And when even the gatekeepers fall victim to deception, who can users possibly rely on for protection?
Same old, same old
This “package-spread-crash” pattern feels all too familiar in financial history.
Whether it’s LUNA, which evaporated $40 billion in 72 hours in 2022 with its “algorithmic stability, 20% annual yield” narrative; or the earlier 2008 crisis, where Wall Street elites repackaged high-risk subprime mortgages into AAA-rated “collateralized debt obligations (CDOs)” through complex financial engineering, ultimately triggering a global financial meltdown. At their core, these schemes share a startling consistency: complexly packaging high-risk assets to appear as low-risk products, then selling them through various channels to investors who cannot fully grasp the underlying risks.
From Wall Street to DeFi, from CDOs to “yield-bearing stablecoins,” the technology evolves, the names change, but human greed remains constant.
Industry data indicates over 50 similar yield-bearing stablecoin projects remain active in the DeFi market today, with a total value locked exceeding $8 billion. Most employ intricate financial engineering to package highly leveraged, high-risk trading strategies into seemingly stable, high-yield investment products.
The root of the problem lies in the fact that we gave these products a misleading name. The term “stablecoin” creates a false sense of security and numbs people to risk. When people see stablecoins, they think of dollar-backed assets like USDC and USDT, not a highly leveraged hedge fund.
One lawsuit won’t save a market, but it can wake one up. When the tide recedes, we should see not only those caught swimming naked, but also those who never intended to wear swim trunks in the first place.
$8 billion, 50 projects—the next Stream could surface at any moment. Until then, remember this simplest of truths: when a product needs to lure you with sky-high annualized returns, it is inherently unstable.
