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, stablecoins experienced another incident.

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

Source: Coingecko

The incident involved a star project managing $500 million in assets—Stream Finance.

They packaged their high-risk financial strategies into a payout stablecoin called xUSD, claiming “pegged to the dollar and automatically earning interest,” essentially wrapping financial gains into the product. If it were a financial strategy, guaranteed profits would be impossible. On October 11, during the major crypto market crash, their off-chain trading strategy failed, resulting in a loss of $93 million, approximately 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, causing xUSD to decouple from its peg.

Panic quickly spread. According to data from research firm Stablewatch, over $1 billion fled from various “payout stablecoins” within the following week. This is 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 was willing to repay or redeem it, plunging the market 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 financial world, the most beautiful masks often hide the sharpest fangs. Stream Finance and its stablecoin xUSD are a typical example.

They claimed that xUSD employed 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 ups and downs, users could earn steady returns.

Within just a few months, it attracted up to $500 million in funds. However, behind the mask, on-chain data analysts uncovered numerous flaws in its 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, dollar-pegged asset, expecting high, stable annual interest. In reality, you’re holding a share in a 4x leveraged hedge fund, with 70% of its positions hidden from view.

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

This is the danger of such “stablecoins.” They use the “stability” label to mask their true nature as hedge funds. They promise ordinary investors the security of bank savings, but their underlying operations are high-risk strategies only professional traders can handle.

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 key vulnerabilities. This collapse of Stream was not a code issue but a human problem.”

This insight hits the mark. The root of Stream Finance’s problems lies in the project team packaging an extremely complex, high-risk, unregulated financial game into a seemingly simple “stable financial product” accessible to ordinary people.

Domino Effect

If Stream Finance created a bomb, then Curator, a DeFi lending product, became the courier delivering that bomb, 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 funds and earn yields with a single click, similar to buying financial products on a bank app. Their main income comes from performance fees taken from user profits.

In theory, they should serve as risk gatekeepers, helping users select quality assets. But their performance fee model also incentivizes chasing high-risk assets. In the highly competitive DeFi market, higher annual yields attract more users and funds, increasing their performance fees.

When the “stable and high-yield” asset of Stream Finance appeared, it immediately became a favorite among many Curators.

The Stream incident exemplifies the worst-case scenario. On-chain data shows that several well-known Curators, including MEV Capital, Re7 Labs, and TelosC, heavily allocated their vaults to high-risk xUSD. For example, TelosC’s exposure alone reached $123 million.

More critically, these allocations were not accidental. Evidence indicates that days before the incident, 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 are also victims of this packaging scam. K3 Capital is one such example. Managing several million dollars on Euler, K3 lost $2 million in the explosion.

On November 7, 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 payout stablecoin called deUSD, claiming to use a “basis trading strategy.” K3 based its trust on this promise and allocated funds accordingly.

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 other financial products, adding an extra layer of risk on top of already high risks.

When Stream’s bad debt was publicly revealed on November 3, K3 immediately contacted Elixir’s founder, Philip Forte, demanding a 1:1 liquidation of deUSD. Forte chose silence and did not respond. Frustrated, K3 was forced to liquidate on November 4, leaving with $2 million in deUSD. On November 6, Elixir declared insolvency, offering to exchange deUSD for USDC at a 1:1 ratio for retail and liquidity pool holders, but refusing to redeem deUSD held in Curator vaults, instead asking for collective negotiation.

K3 has now hired top U.S. lawyers to sue Elixir and Forte for unilateral changes, false advertising, and to recover damages, including forcing the redemption of deUSD into USDC.

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

Same Old Song

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 elites packaging risky subprime mortgages into AAA-rated “quality bonds (CDOs),” the core is consistent: high-risk assets are complexly 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 “payout stablecoins,” technology changes, names change, but human greed remains unchanged.

Industry data shows that over 50 similar payout stablecoin projects are still operating in the DeFi market, with total locked value exceeding $8 billion. Most of these are using complex financial engineering to wrap high-leverage, high-risk trading strategies into seemingly stable, high-yield financial products.

Source: stablewatch

The root problem is that we give these products the wrong name. The words “stablecoin” create a false sense of security and complacency about risk. When people see stablecoins, they think of USDC, USDT—dollars backed assets—not high-leverage hedge funds.

A lawsuit can’t save a market, but it can wake it up. When the tide recedes, we should see not only those swimming without swimsuits but also those who never intended to wear one 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 relies on ultra-high annualized returns to attract you, it is inherently unstable.