The Explosion Behind Stream xUSD: The Three Deadliest Traps in DeFi

On “Red Friday” October 11th, a stablecoin project claiming to be “delta neutral” called Stream suddenly collapsed, with xUSD falling from 1 USD to 0.6 USD. This is not just a simple price drop, but a chain explosion of systemic risk.

Trap 1: The False Neutral Strategy

The story of Stream sounds very familiar: MakerDAO, Frax, and Aave have all succeeded, so why can't Stream? The problem lies in the difference between the paradise and hell of transparency.

Stream claims to have a TVL of $500 million, but only $150 million can be seen on-chain. Where did the remaining $350 million go? The answer is: a secret off-exchange trading strategy. It was later discovered that Stream's traders were engaging in a “short volatility” strategy—a play that sounds quite dangerous.

The logic of selling volatility is simple: the calmer the market, the more you earn, it’s like picking up coins in front of a bulldozer. Until one day the bulldozer comes…

Trap 2: The Death Spiral of Leveraging and Leveraging

The deadliest part is that Stream used recursive lending to leverage.

What is recursive lending? Simply put, it is:

1. Deposit 1000U
2. Borrow 1000U (using the first deposit as collateral)
3. Then deposit the borrowed 1000U and continue to borrow.
4. Infinite loop, finally using a $95 million position on the Euler platform…

The xUSD in the Stream wallet accounts for 60% of the circulation, all of which is leveraged. Even more frightening is that it uses another stablecoin, Elixir, for secondary leverage. When one layer of leverage collapses, the entire domino effect falls.

Trap Three: Priority Liquidation Rights - Unequal Game Rules

This is the darkest part.

Elixir has “priority liquidation” in the protocol. What does it mean? If Stream goes bankrupt, Elixir can withdraw its funds first, and other users can only take what is left.

The result is:

• Whales/In institutions: Exit early, taking away profits
• Retail investors: discovering that their losses have been “socialized” - that is, the Auto Deleveraging mechanism spreads the losses of the losers to the traders who are still making profits.

A loss of 350 million USD occurred silently.

Why We Must Be Vigilant Now

The volatility of “Red Friday” is at a decade-level occurrence. Algorithmic traders' risk models are based on the “moderate volatility” data from the past 5 years, and when faced with extreme volatility, even 2x leveraged positions were completely liquidated.

The collapse of Stream could have been avoided—if:

• ✓ Transparent strategy, verifiable on-chain
• ✓ No unequal priority agreements
• ✓ Clear risk disclosure

But the question now is: how many “Streams” are lurking in the dark using the same tactics?

How to Save Yourself

The industry has begun to reflect. The Trading Strategy team proposed the “Vault Technology Risk Rating Framework” to allow users to independently assess the risks of DeFi products. The core idea is simple: transparent information leads to responsible projects, and junk projects naturally attract no investment.

As an investor, remember this phrase: high risk, high reward is true, but the premise is you really understand those risks.

Those annualized returns of 15% require a combination of 64% leverage, off-exchange trading, and recursive lending to achieve… Are you sure you understand the risks involved?