Stream Finance, a yield-optimization focused DeFi<\/a> project that issued a synthetic dollar token called xUSD, told users on Nov. 4<\/a> that an \u201cexternal fund manager\u201d had lost about $93 million in assets tied to the project.<\/p>\n Within a day, xUSD lost over 85% of its value, collapsing from $1.26 to as low as $0.16 by press time. Withdrawals from the platform were frozen, and a dense web of interconnected yield vaults began to unwind, raising questions about how much of DeFi\u2019s apparent growth was built on what are known as circular lending loops.<\/p>\n The disclosure also came shortly after reports surfaced<\/a> that established DeFi protocol Balancer had been exploited for over $100 million, further shaking confidence<\/a> in the sector.<\/p>\n As the dust settles, reports continue to surface that indicate the scale of the fallout across DeFi.<\/p>\n Stream Finance describes itself as a \u201ctokenized market neutral fund.\u201d The project\u2019s main slogan, \u201cThe SuperApp DeFi Deserves,\u201d remains prominently placed on its website at press time, alongside a promise to simplify earning yield on-chain. <\/p>\n But the way Stream worked was largely a black box. Users would deposit supported assets \u2014 USDC, ETH, BTC, or EURC \u2014 into vaults that promised double-digit APYs. The Stream Finance team would then reallocate those funds into other protocols in various opaque and not fully disclosed strategies in order to deliver the high returns to depositors. Per Stream\u2019s platform, these strategies included \u201clending arbitrages, to incentive farming, to dynamically hedged HFT, to market making.\u201d<\/p>\n In return for deposited assets, Stream Finance issued corresponding yield-bearing tokens, such as xUSD for USDC deposits, which total over $382 million on the platform at press time, with APY at 18%, per Stream\u2019s official platform.<\/p>\n For comparison, at the time of writing, DeFi\u2019s largest lending protocol, Aave, currently offers 4.8% APY on USDC deposits, while Compound offers just over 3%.<\/p>\n While the value proposition of Stream Finance \u2014 much higher yield on stablecoin deposits \u2014 was clear, the \u201cyield-optimizing\u201d corner of DeFi is also explicitly high-risk. As the platform itself noted, risks include \u201cExecution failure, smart contract risk, custody risk.\u201d<\/p>\n To provide the higher-than-usual yield, players like Stream build on-chain positions that include self-looped lending markets, risk curators, and automated strategies\u2014 all without disclosure to users lending or depositing their assets \u2014 which makes understanding the full scope of risk complex, if not impossible.<\/p>\n Even before Stream revealed its losses and xUSD collapsed, some in the crypto community had already noticed something was off. After crypto\u2019s biggest liquidation event ever on Oct. 10, which wiped out around $20 billion<\/a> from the market, Stream Finance and a few others were suspiciously acting as if nothing had happened.<\/p>\n That raised eyebrows among on-chain analysts who began<\/a> increasingly<\/a> flagging<\/a> a pattern where Stream Finance was lending and borrowing its own assets, recycling borrowed tokens into partner vaults, and minting new yield tokens on top, effectively creating circular liquidity and inflating total value locked.<\/p>\n And for some time, that tactic worked, as looped liquidity pushed Stream Finance\u2019s self-reported<\/a> total value locked (TVL) above $200 million. However, many now question this tactic, saying tracking sites likely double-counted<\/a> bridged tokens, artificially inflating TVL.<\/p>\n As warning signs popped up, DefiLlama updated its metrics, wiping millions off Stream Finance\u2019s TVL page. After news broke of Stream\u2019s collapse, DefiLlama\u2019s pseudonymous founder, 0xngmi, posted<\/a> on X that they might start asking protocols with funds on centralized exchanges to share data, because \u201ccurrently all protocols with funds on CEXs are a black box in terms of verification.\u201d<\/p>\n DeFi yield aggregator Yearn\u2019s lead, known on X as Schlag, posted<\/a> yesterday evening that \u201cnone of what happened came out of nowhere,\u201d adding that \u201cas with any good bubble\/blow up, it has been slowly brewing and was simply a matter of time till it burst.\u201d Schlag also added that Stream Finance is \u201cfar from the only ones out there with bodies to hide.\u201d<\/p>\n On Oct. 28, just a few days before Stream reported its $93 million hole, Schlag had sounded the alarm on X<\/a> in a detailed article, reporting that Stream Finance and Elixir, a DeFi protocol focused on liquidity provisioning, were using hidden markets on lending protocol Morpho.<\/p>\n Per Schlag\u2019s report, Elixir was supplying USDC via Morpho\u2019s private vault, in which Stream Finance was the only borrower, using its own xUSD as collateral. \u201cIt is hard to know for sure how much actual collateral is backing this full system, but it seems likely to be sub $0.10 per $1,\u201d Schlag concluded at the time.<\/p>\n Schlag also explained how Stream and Elixir executed a so-called looping mechanism, \u201crecursively minting each other’s tokens in order to inflate their own TVL and create a ponzu the likes of which we haven’t seen for awhile in crypto.\u201d As Yearn\u2019s lead explained, Stream Finance\u2019s xUSD wallet received millions in USDC, cycled the funds through multiple addresses, swapped into USDT, minted Elixir\u2019s own synthetic dollar token, deUSD, and then used the borrowed assets to mint more xUSD.<\/p>\n \u201c[…] using the same $1.9m USDC they minted about 14.5m xUSD […],\u201d Schlag wrote.<\/p>\n On Nov. 3, Elixir responded to concerns about xUSD that were increasingly circulating on social media, saying<\/a> that it had \u201cfull redemption rights at $1 with Stream\u201d and claimed to be \u201cthe only creditor with these 1-1 rights.\u201d <\/p>\n The breaking point came that same day, on Nov. 3, when Balancer V2, one of the biggest automated market makers, was hacked for $128 million. The exploit sparked confusion about potential contagion, and liquidity providers rushed to exit any pools that looked connected, triggering a classic bank run on Stream Finance, as users rushed to withdraw their funds.<\/p>\n On Nov. 4, Stream unveiled<\/a> the $93 million loss, but offered few details, except that it had hired U.S. law firm Perkins Coie LLP to investigate the incident. The project then notified users that it had suspended both withdrawals and deposits.<\/p>\n By then, xUSD\u2019s value had already crashed far below $1, and the web of vault integrations began to break down. When the collapse finally hit, the scope of those hidden loops became at least somewhat visible.<\/p>\n Several major DeFi protocols, including<\/a> Morpho, Euler, Silo, and Gearbox, were found to have accepted Stream Finance\u2019s xUSD as collateral, despite evidently being aware of the asset\u2019s recursive minting structure. This interconnected setup allowed xUSD-backed positions to spread across multiple lending markets, amplifying risk throughout the ecosystem.<\/p>\n As the scheme unraveled, reports<\/a> surfaced that risk curators and vault managers such as Beefy, Silo, and Valarmore had reallocated user funds into xUSD without transparent disclosure, leaving depositors unknowingly exposed to Stream\u2019s token. <\/p>\n \u201cToo many entities, no oversight,\u201d JohnnyTime, founder of web3 security firm Ginger Security, wrote in an X thread<\/a> on Nov. 4.<\/p>\n Speaking with The Defiant, Driss Benamour, co-founder and CEO of YO Labs, the firm behind multi-chain yield optimizer YO, called the strategy behind xUSD a \u201cdegen practice in DeFi,\u201d clarifying that \u201cYO vaults had no exposure to xUSD and yUSD.\u201d<\/p>\n Silo Labs, the firm behind the Silo protocol, said in a press release shared with The Defiant on Nov. 5 that the Silo DAO is also preparing to take legal action, but against the Stream team, as the incident \u201chas left lenders unable to access funds or redeem xUSD and xBTC.\u201d<\/p>\n In the release, Silo Labs said that Silo DAO will work closely with its legal counsel to prepare and coordinate the case to seek \u201cmaximum possible repayment, distributed pro rata to all affected lenders.\u201d<\/p>\nWhat Is Stream Finance?<\/h2>\n
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How Things Started: Recursive Minting <\/h2>\n
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The Fallout<\/h2>\n
Stream\u2019s Response<\/h2>\n