- The collapse of Stream Finance caused a chain reaction, impacting various decentralized finance (DeFi) projects.
- Depositors in affected vaults faced losses, with some vaults on Morpho taking haircuts up to 12%.
- Depegging of stablecoins like Elixir’s sdeUSD and Stream Finance’s xUSD intensified the crisis.
- Permissionless platforms such as Morpho and Euler maintain a hands-off approach, considering themselves infrastructure rather than risk managers.
- The event has renewed calls for transparency and risk ratings in DeFi stablecoin vaults, highlighting that high yields carry significant risk.
Stream Finance’s collapse nearly two weeks ago triggered a sequence of failures across the decentralized finance (DeFi) sector. The incident exposed risky interconnected lending schemes offering unusually high stablecoin returns, which destabilized multiple projects.
Affected depositors, particularly in Morpho-managed USDC vaults by MEV Capital, faced haircuts of 3.5% on Ethereum and 12% on Arbitrum vaults. These vaults had exposure to severely depegged stablecoins, including Elixir’s 99.8% off-peg sdeUSD and Stream Finance’s 95% depegged xUSD. Marc Zeller, an industry figure from Aave, publicly mocked the situation.
Another major exposed entity, Re7 Labs, revealed $14 million of exposure to deUSD and $13 million to Stable Labs’ 85% depegged USDX. Since November 8, updates from Re7 Labs have been limited, disclosing only the recovery of a $200,000 position in a Morpho vault. Hyperithm, issuer of mHYPER, reported that 30% of deposits in its USDT Euler vault were locked in a Re7 Labs vault. Users can withdraw 70% immediately and retain rights to the remaining 30%, pending resolution.
Permissionless lending platforms like Morpho and Euler emphasize their role as infrastructure providers. They allow anyone to create markets with self-determined risk parameters. Responding to concerns, Morpho paused deposits to affected vaults, while Euler removed some high-risk vaults from its user interface and added cautionary messages. Both teams stress that they offer isolated vaults suited to various risk appetites, governed by curators. Transparency dashboards displaying on-chain data have been suggested to support a “buyer beware” policy.
This series of failures has challenged the belief that high stablecoin yields up to 20% are safe. Steakhouse Financial has pledged $2.5 million in “skin in the game” as a first-loss cushion to restore trust. The collapse has reignited discussions about instituting risk ratings for individual vaults to better inform users. Despite these setbacks, the recurring nature of such crises in DeFi suggests that similar issues may arise again in the future.
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