Stop packaging high-risk financial products as stablecoins.

The world of stablecoins has never lacked stories; what it lacks is reverence for risk. In November, another stablecoin incident occurred.

A so-called “stablecoin” called xUSD experienced a flash crash on November 4th, dropping from $1 to $0.26. As of today, it continues to decline, falling to $0.12, erasing 88% of its market value.

Image source: Coingecko

The culprit was a star project managing $500 million in assets—Stream Finance.

They packaged their high-risk financial strategies into a dividend-paying stablecoin, xUSD, claiming to be “pegged to the dollar and automatically earning interest,” essentially wrapping financial gains into the product. But if it were truly a financial strategy, guaranteed to always profit, it wouldn’t have failed during the massive crypto market crash on October 11th. Their off-chain trading strategies failed, resulting in a loss of $93 million, roughly 66 million RMB—enough to buy over forty 100-square-meter apartments in Beijing’s Second Ring Road.

A month later, Stream Finance announced a suspension of all deposits and withdrawals, and xUSD’s peg broke.

Panic spread rapidly. According to data from research firm stablewatch, over $1 billion was hurriedly withdrawn from various “dividend stablecoins” within the following week. This was equivalent to a medium-sized city’s commercial bank deposits being drained in just 7 days.

The entire DeFi financial market sounded alarms, with some protocols seeing borrowing rates soaring to an astonishing -752%, meaning collateral became worthless, and no one would repay or redeem it. The market plunged into chaos.

All of this stemmed from a seemingly good promise: stability and high returns.

When the illusion of “stability” is shattered by a big red candle, we must reevaluate which stablecoins are truly stable and which are just high-risk financial products disguised as stablecoins, and question why high-risk financial strategies can now openly call themselves “stablecoins.”

The Emperor’s New Clothes

In the world of finance, the most beautiful masks often hide the sharpest fangs. Stream Finance and its stablecoin xUSD are a typical example.

They claimed that xUSD used a “Delta-neutral strategy.” This is a complex term from professional trading, aiming to hedge market volatility risks through a series of sophisticated financial instruments, sounding very safe and professional. The project’s story was that, regardless of market rises or falls, users could earn steady returns.

Within just a few months, it attracted up to $500 million in funds. But peeling back the mask, on-chain data analysts revealed numerous flaws in xUSD’s actual operation.

First, there was extreme opacity. Of the claimed $500 million in assets, less than 30% could be verified on-chain; the remaining “Schrödinger’s $350 million” was operated in unseen places. No one knew what was happening inside this black box until it failed.

Second, the leverage was staggering. The project used only $170 million of real assets to repeatedly collateralize and borrow across other DeFi protocols, leveraging up to $530 million—an actual leverage ratio exceeding 4 times.

What does this mean? You think you’re exchanging for a stable “digital dollar” and dreaming of annual interest rates of over ten percent. In reality, you’re holding a 4x leveraged hedge fund LP share, with 70% of its positions invisible to you.

What you believe to be “stability” is actually your money engaged in ultra-high-frequency trading in the world’s largest digital casino.

This is the danger of such “stablecoins.” They use the label “stability” to mask their true nature as hedge funds. They promise ordinary investors the safety of bank savings, but their underlying operations are high-risk strategies only 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 weak points. This collapse of Stream isn’t a code problem; it’s a human problem.”

This insight hits the mark. The root of Stream Finance’s failure lies in packaging an extremely complex, high-risk, unregulated financial game into a seemingly simple “stable financial product” that anyone can participate in.

Domino Effect

If Stream Finance created a bomb, then the DeFi lending products like Curator became the courier, ultimately causing a widespread chain reaction.

In emerging lending protocols like Morpho and Euler, Curator acts as a “fund manager.” Mostly composed of professional investment teams, they package complex DeFi strategies into “strategy vaults,” allowing ordinary users to deposit and earn returns with a single click, similar to buying financial products on a bank app. Their main income comes from performance fees deducted from user yields.

In theory, they should be professional risk gatekeepers, selecting quality assets for users. But the performance fee model also incentivizes chasing high-risk assets. In the hyper-competitive DeFi market, higher annual yields attract more users and funds, increasing their performance fees.

When Stream Finance’s “stable yet high-yield” asset appeared, it quickly became a favorite among many Curators.

The recent incident shows the worst-case scenario. On-chain data tracking reveals that several well-known Curators—such as MEV Capital, Re7 Labs, and TelosC—had heavily allocated their vaults to high-risk xUSD. For example, TelosC alone had a risk exposure of $123 million.

More critically, these allocations weren’t accidental. Evidence shows that days before the event, multiple industry KOLs and analysts publicly warned about transparency and leverage risks associated with xUSD. Yet, these Curators, holding significant funds, chose to ignore the warnings.

Some Curators were also victims of this packaging scam. K3 Capital, for instance, managed several million dollars on Euler and lost $2 million in the explosion.

On November 7th, K3’s founder publicly revealed on Euler’s Discord how they were deceived.

Source: Discord

The story begins with another “stablecoin” project. Elixir issued a dividend-paying stablecoin called deUSD, claiming to use a “basis trading strategy.” K3 based their vault configuration on this promise.

However, in late October, without any approval from Curators, Elixir unilaterally changed its investment strategy, lending about $68 million USDC via Morpho to Stream Finance, shifting from basis trading to a layered financial scheme.

These are two entirely different products. Basis trading involves direct investment in specific trading strategies with relatively controlled risk. Layered financial schemes involve lending money to another financial product, adding an extra layer of risk on top of already high risk.

When Stream’s bad debt was publicly exposed on November 3rd, K3 immediately contacted Elixir’s founder, Philip Forte, demanding a 1:1 liquidation of deUSD. Forte chose silence, ignoring the request. Frustrated, K3 was forced to liquidate on November 4th, leaving behind $2 million in deUSD. On November 6th, Elixir declared insolvency, offering retail investors and liquidity pools a 1:1 exchange of deUSD for USDC, but refusing to redeem deUSD held in Curator vaults, instead asking for collective negotiations.

K3 has now hired top U.S. lawyers to sue Elixir and Forte for unauthorized changes, false advertising, and to recover damages, demanding the deUSD be redeemed for USDC.

When gatekeepers start selling risk themselves, the fortress’s fall is only a matter of time. And when the gatekeepers are also duped, who can we rely on to protect users?

Same Soup, Different Bowls

This “packaging—spreading—collapse” pattern is all too familiar in financial history.

Whether it’s Luna in 2022, which evaporated $40 billion in 72 hours with its “algorithmic stablecoin yielding 20% annualized,” or the 2008 global financial crisis triggered by Wall Street’s complex packaging of high-risk subprime mortgages into AAA-rated “collateralized debt obligations (CDOs),” the core remains consistent: high-risk assets are intricately packaged to appear low-risk, then sold through various channels to investors who often don’t fully understand the risks.

From Wall Street to DeFi, from CDOs to “dividend stablecoins,” technology and names change, but human greed remains unchanged.

According to industry data, over 50 similar dividend stablecoin projects are still operating in the DeFi market, with total locked value exceeding $8 billion. Most of these projects use complex financial engineering to wrap high-leverage, high-risk trading strategies into stable and high-yield financial products.

Image source: stablewatch

The root problem is that we’ve given these products the wrong name. The term “stablecoin” creates a false sense of security and risk complacency. When people hear “stablecoin,” they think of USDC, USDT—assets backed by dollar reserves—not high-leverage hedge funds.

A lawsuit can’t fix a market, but it can wake it up. When the tide recedes, we should see not only those swimming without clothes but also those who never intended to wear any in the first place.

$8 billion, 50 projects—another Stream could emerge at any time. Before that happens, remember a simple truth: when a product needs ultra-high annualized returns to attract you, it’s inherently unstable.