1011 Bloodbath in DeFi: The Truth Behind the Collapse of Stream XUSD: The High-Risk Operations Behind the Illusion of Stablecoins

On October 11, the major liquidation event was referred to by the Western community as “Red Friday”. It not only shook the crypto market but also caused a so-called “stable” DeFi project, Stream xUSD, to completely collapse. Originally claiming to use a “delta neutral” hedging strategy to stabilize prices, Stream is now facing a crisis of insolvency due to opaque high-risk operations and severe market fluctuations.

From the perspective of Trading Strategy, this will comprehensively break down the ins and outs of this event, as well as its impact on the entire Decentralized Finance ecosystem.

(USD Flash Crash Storm: The largest single-day liquidation in history, severely impacting the crypto market, Binance experiences order book failure )

What is Stream xUSD? A hedging fund marketed as a stablecoin.

Stream xUSD claims to be a “decentralized stablecoin,” but in reality, it resembles a tokenized hedge fund that claims to generate stable returns through a “delta-neutral strategy.” Such strategies are theoretically supposed to maintain the net asset value stable during market fluctuations, thus being seen as a potential support mechanism for stablecoins.

However, compared to other well-known DeFi projects such as MakerDAO, Frax, Ohm, or Ethena, Stream clearly lacks transparency. Although the official claim states that the TVL (Total Value Locked) exceeds 500 million USD, only about 150 million USD is actually visible on-chain, while the remaining funds are invested in invisible off-chain strategies.

Trigger for the Crash: Off-chain Selling Fluctuation Strategy Explodes, Losing Nearly 100 Million USD

According to reports, Stream has entrusted a large amount of funds to a proprietary trading team, employing a “short volatility” strategy. This strategy can generate stable returns when market volatility is low, but it can lead to significant losses if volatility rises sharply.

Unfortunately, this is exactly what happened during the Great Liquidation. At that time, the announcement of a new round of trade tariffs by former U.S. President Trump triggered panic in the global market, and the crypto market was also affected. A large amount of leveraged positions were liquidated, leading to severe fluctuations in the market, which is precisely the situation that the “sell volatility” strategy fears the most.

It is reported that some traders on Stream have incurred losses of up to 100 million USD during this wave of events, plunging the entire protocol into a financial crisis.

The automatic deleveraging mechanism is activated, leading to a chain explosion in the crypto market.

This wave of market turbulence has also triggered the “Automatic Deleveraging (ADL)” mechanism in the perpetual contract market. Due to excessive leveraged positions and insufficient market depth, liquidations could not be completed smoothly, and ADL started to force liquidation, distributing losses to other traders, resulting in further market distortion and panic.

This level of fluctuation is considered a “once-in-a-decade” event in the crypto market, but many algorithmic trading models are designed based on the stable market conditions of the past few years. Therefore, this sudden massive shock directly wrecked many strategies, and even using 2x leverage did not provide immunity.

Delta neutral strategy fails, Stream is exposed as not a “stablecoin”

According to financial definitions, a delta-neutral strategy should “not incur losses.” However, Stream's actual operations involve investing funds in high-risk, opaque off-chain transactions, which fundamentally contradicts the principles of delta neutrality.

In other words, Stream is not actually engaging in real “Hedging”, but rather conducting high-risk investments under the banner of stablecoins. Now these strategies have failed, resulting in severe capital losses, and Stream is facing substantial bankruptcy. Currently, the price of Stream xUSD is only about 0.79 USD, far below its claimed 1 USD peg.

Leveraged Hedging: Stream's “Recursive Cycle” doubles the risk.

Worse still, Stream has adopted a “recursive looping” strategy — using its own held assets as collateral to borrow more funds, which are then reinvested into lending or operations, creating a leverage-on-leverage model.

Stream also provides funding and collateral to another stablecoin protocol, Elixir. Elixir even claims to have “priority” in the asset liquidation of Stream, which could mean that the losses of ordinary investors will be further exacerbated.

(xUSD 280 million explosion will trigger a cascade liquidation of stablecoins? Elixir deUSD has more than half of its collateral lent to Stream Finance)

Community Outrage: Opacity, Losses, and Priority Allocation Anger Users

The collapse event has led to strong condemnation of Stream and Elixir by the community. Users not only suffered huge losses but also found that they had no fair chance at all, even suspecting that Stream was using its own oracle to falsify accounts, secretly converting users' profits into gains for the management.

DeFi operator Rob pointed out: “Those who think they are borrowing against collateral on Euler are actually engaging in effectively unsecured lending.”

Now don't touch: Stream related vaults have extremely high APY but the risks are off the charts.

After the collapse of Stream, its related lending vaults offered an APY of over 50% to attract funds, but these vaults are currently in a “100% utilization rate” status, which means that all funds have been lent out and cannot be withdrawn normally; some are even at a level where they cannot be repaid.

In simple terms: going into these vaults now is almost equivalent to burning money.

The transparency and composability of DeFi is a double-edged sword.

Taiwanese DeFi researcher Yu Zhe-an also provided profound insights regarding the Stream xUSD incident and the overall DeFi ecosystem. He pointed out that the core characteristics of DeFi — transparency and composability — are, in bull markets and bear markets, respectively, a blessing and a curse:

“In a bull market, the advantages of DeFi are transparency and composability, which can rapidly stack up a prosperous and diverse financial ecosystem. However, in a bear market, these characteristics can turn into fatal flaws. The barriers to composability are too low, and the risk transmission distance can be very far.”

Traditional financial products may only affect two to three layers of asset relationships when risks emerge; however, in DeFi, risks can propagate down to five or six layers, even across protocols and chains. Worse yet, not all DeFi protocols have asset allocations that are visible on-chain. For example, Stream was only revealed to everyone after manual disclosures that they had “boarded a burning chain ship.”

He also reminded that the panic caused by the “over-transparency” of DeFi is a self-fulfilling panic: “Everyone can see the flow of funds on-chain in real time, and no one wants to be the last one to leave. This kind of panic withdrawal is faster and fiercer than traditional bank runs.”

In addition, he warned against mistakenly believing that avoiding perpetual contracts and only participating in stablecoin yields is a conservative strategy. In fact, on-chain yields of 10% are far higher than government money market funds; the real question is:

“Can you calculate what risk cost comes with this 6% interest spread?”

The Rise of RWA and Off-System Risks: Crises on the Chain will Affect the Off-Chain

Yu Zhe'an further pointed out that the deep integration between DeFi and real-world assets (RWA) is brewing a new round of systemic risk:

“Everyone is now thinking about putting real-world assets on the chain, but the liquidity of stablecoins on the chain is scarce, and there is no lender of last resort. This means that once a DeFi protocol encounters risk, a large amount of RWA collateral will be liquidated, and only the RWA issuers will have the ability to redeem the underlying assets at primary market prices.”

Such a mechanism may cause on-chain crises to directly reflect in the off-chain asset market, which he previously referred to as:

“Market risk feedback outside the system.”

This is very similar to the comprehensive financial panic in the United States in 1907, which also led to a liquidity crisis spreading due to the lack of a “lender of last resort,” ultimately resulting in the establishment of the Federal Reserve.

However, the current on-chain ecosystem does not have a role similar to that of the Federal Reserve to provide a last line of defense for the market. Yu Zhe'an warns:

“We are gradually creating a systemic environment that could replicate the conditions of the 1907 financial panic. The key point is that this time the Federal Reserve cannot save us through stablecoin operators.”

DeFi is a financial tool, not a belief.

Red Friday is not just a tragedy for Stream, but a warning for the entire DeFi ecosystem. When you don't know where the money has gone and cannot verify if the protocol is honest, you cannot assess risk and return.

As pointed out in the Trading Strategy, the future development of DeFi hinges on enhancing risk transparency and user education; and as reminded by Yu Zhe'an, we should also be aware that DeFi is gradually aligning with real financial structures and lacks a market rescue mechanism.

DeFi can be a powerful financial tool, but it is by no means a belief. Whether it is a stablecoin vault with 50% APY or a “delta neutral” package, if the underlying strategies are unverifiable and excessively leveraged, they will eventually reveal flaws.

Ultimately, those who survive are not the smartest, nor the greediest, but those who understand risk and transparency the best.

This article 1011 Bloodbath in DeFi: The Truth Behind the Collapse of Stream xUSD: High-Risk Operations Behind the Illusion of Stablecoins First Appeared in Chain News ABMedia.