Elixir shuts down deUSD stablecoin: Stream Finance collapse triggers a "domino effect"

On November 7, 2025, the decentralized stablecoin protocol Elixir announced the gradual shutdown of its synthetic USD stablecoin, deUSD. This followed a bad debt risk arising from a $68 million loan to Stream Finance, which faced losses due to its investment downturn. Elixir has processed redemptions for 80% of deUSD holders and took a snapshot of remaining balances, promising 1:1 USDC redemption through an upcoming claims portal.

This event occurred after Stream Finance suspended withdrawals on November 4, revealing a $93 million loss and a total debt of $285 million. The deUSD shutdown exposes structural risks in decentralized stablecoins related to managing exposure to real-world assets (RWA).

Risk Transmission and Crisis Timeline

The crisis traces back to Stream Finance’s aggressive investment strategy. As a decentralized asset management protocol, Stream entrusted user deposits to the traditional hedge fund Ouroboros Capital, which lost $93 million in leveraged rate arbitrage trades, leading to liquidity collapse. On November 4, Stream paused all withdrawals, triggering a chain reaction—their issued xUSD stablecoin decoupled from $0.20, affecting multiple DeFi protocols relying on it.

Elixir became the largest single creditor. On-chain data shows Elixir lent $68 million of deUSD to Stream via the Morpho protocol, used to support xUSD’s peg. When collateral values declined, Elixir could have initiated liquidation, but given the concentration risk—Stream held about $75 million of deUSD, accounting for 90% of total—the forced liquidation risked a death spiral.

The crisis response exhibited decentralized governance features. On November 6, Elixir launched a community vote, with 93% support to shut down deUSD and initiate full redemptions. To prevent Stream from dumping deUSD before closure, the protocol immediately disabled minting/redemption functions and coordinated orderly unwinding with lending platforms like Euler and Compound. While this swift action avoided broader contagion, it caused the collapse of Stable Labs’ USDX token.

Design Flaws and Mechanism Reflection of deUSD

deUSD’s architecture contains fundamental contradictions. As a “fully decentralized” stablecoin, it employs a dual-collateral model—partially backed by over-collateralized crypto assets, and partly generating yield through investments in RWAs via protocols like Stream. This design aimed to replicate the success of Ethena’s USDe but overlooked liquidity mismatches in RWA investments. When Stream’s portfolio suffered losses, deUSD’s collateralization ratio plummeted from 125% to 85%.

The yield model overly depends on a single counterparty. Elixir allocated 70% of treasury assets to Stream’s traditional financial strategies, violating basic DeFi risk diversification principles. More critically, deUSD’s interest rate mechanism targeted an 8% yield, requiring higher credit risk to achieve this, reminiscent of the incentives before the Terra-Luna collapse in 2022.

Regulatory arbitrage also posed hidden risks. To avoid securities law, deUSD refused KYC procedures but indirectly invested in SEC-regulated securities through Stream. This structure exposes investors to dual uncertainties—lacking traditional investor protections while losing full transparency of pure on-chain protocols. The U.S. SEC has indicated investigations into whether such hybrid models qualify as securities.

Resolution Plans and Creditor Rights

Elixir’s unique position lies in its “full redemption right.” According to the loan agreement, in case of Stream’s default, Elixir, as a senior creditor, can redeem collateral at a 1:1 ratio, while other creditors share remaining assets proportionally. This structural advantage means deUSD holders could potentially receive full repayment, contingent on Elixir recovering its loans.

Claims are processed in phases. The first phase, targeting wallets holding deUSD directly, has completed 80% redemption via the original portal. The second phase, through a new claims portal, will handle the remaining 20%, including AMM liquidity providers and lending market users. All balances are based on the November 7 snapshot, with Chainlink oracles determining final amounts.

Legal complexities surround fund recovery. Although Stream theoretically holds sufficient collateral, its portfolio includes bankrupt companies’ bonds, which may take 6-12 months to liquidate. Elixir is working with legal teams to evaluate potential lawsuits against Ouroboros Capital and exploring the possibility of tokenizing claims for secondary market sale at a discount.

Impact on the Decentralized Stablecoin Ecosystem

This crisis exposes the evolutionary dilemma of algorithmic stablecoins. deUSD represents a third-generation approach—supporting value through RWA yields, avoiding the centralization risks of USDT and the capital inefficiency of DAI. However, the reality shows that involving traditional financial assets inevitably introduces counterparty risk. This has prompted Aave and Compound to reassess their RWA strategies, pausing new asset onboarding.

Regulatory attention has sharply increased. The U.S. Financial Stability Oversight Council (FSOC) held an emergency meeting on November 6 to discuss interconnected risks in DeFi protocols, especially cross-exposure between stablecoins and traditional assets. The EU’s banking authority recommended including algorithmic stablecoins under MiCA Phase II regulations, requiring at least 60% high-liquidity collateral.

Institutional adoption may slow. For example, Hamilton Lane announced in October that its tokenized HLSCOPE fund used deUSD as collateral; the recent events have led the firm to pause further digital asset plans. Such setbacks could delay broader integration of traditional finance into DeFi, especially among conservative investors like insurance and pension funds.

Risk Prevention and Future Evolution

Risk modeling needs fundamental improvements. Current DeFi protocols lack sufficient quantification of traditional financial risks, such as bond duration mismatches and credit default probabilities. New protocols are integrating traditional finance risk databases; for instance, Credmark’s credit risk oracles are beginning to be adopted by major lending platforms.

Collateral management is shifting toward conservatism. Compound has proposed lowering RWA collateral factors from 75% to 50%, while Aave considers dynamic collateral ratios that adjust with market volatility. Decentralized insurance protocols like Nexus Mutual are launching coverage products for RWA defaults, with annual premiums around 3-5%.

Stablecoin design is reverting to simplicity. Several new projects are abandoning complex yield models in favor of fully on-chain over-collateralization. Liquity v2, for example, uses Bitcoin and Ethereum as dual collateral with a target collateral ratio of 150%. MakerDAO has reaffirmed its “pure crypto” strategy, planning to fully exit RWA positions by 2026.

Conclusion

The closure of Elixir’s deUSD is a painful but necessary calibration in the evolution of DeFi. It demonstrates that no financial innovation can bypass the fundamental law of risk pricing—high returns come with high risks. While the full redemption promise minimizes user losses, this incident prompts the entire industry to reevaluate the essence of stablecoins: should they aim for absolute decentralization and purity, or find practical balance through measured centralization? As regulatory clarity improves and risk models advance, the next generation of stablecoins will learn vital lessons from this crisis, driving more resilient and sustainable solutions.