Stream Finance Stablecoin Plunges 77% After Protocol’s Fund Manager Loses $93 Million

Stream Finance disclosed late Monday that an external fund manager overseeing its funds lost approximately $93 million in user assets, causing a 77% crash in the price of its flagship stablecoin and exposing critical vulnerabilities in DeFi’s interconnected lending ecosystem.

The protocol announced that it has suspended all withdrawals and deposits while it engaged the law firm Perkins Coie to investigate the incident and determine the priorities of creditors.

“We are actively withdrawing all liquid assets and expect this process to be completed shortly,” Stream Finance wrote about X.

“Until we can fully assess the scope and causes of the loss, all withdrawals and deposits will be temporarily suspended,” wrote the protocol. “Any pending deposits will not be processed at this time.”

The loss caused Staked Stream USD (xUSD) to depeg shortly after, quickly falling to around $0.50, according to the blockchain security company. PeckShield. At the time of writing, CoinGecko The data shows xUSD trading at just $0.26, a 77% drop in the last 24 hours.

DeFi Yields and More (YAM) research group identified nearly $285 million in direct debt exposure across multiple lending protocols, including Euler, Silo, Morpho, and Gearbox, with trustees TelosC, Elixir, MEV Capital, and Varlamore among the most exposed creditors.

“It is not clear how this will be resolved between xUSD/xBTC/xETH holders and lenders against these tokens,” YAM warned. xBTC and xETH are the packaged versions of Performance Stream Bitcoin and ethereum which, like xUSD, were used as collateral through DeFi loan markets.

The team noticed stablecoins with indirect exposure includes USD’s Elixirwhich had lent 68 million USDC to Stream, they represent 65% of their support, and Treeve’s scUSD through complex chains of rehypothecation.

Remortgage chains are when the collateral is used several times in different loan platforms, creating a cascade effect.

The collapse comes days after an anonymous trader on the chain “Cbb0fe” warned Data on the Stream chain showed xUSD’s supporting assets at only about $170 million while the loan reached $530 million, a leverage ratio of more than 4x through the protocol’s “recursive looping” strategy.

Decrypt reached out to Stream Finance and Cbb0fe for comment, but did not immediately receive a response from either party.

“Recursive looping is when a protocol loops its own asset to capture a spread of interest rates,” Stream. explained in a recent post defending the strategy.

However, controversy erupted when users discovered that Stream had allegedly accumulated an undisclosed “insurance fund” from the profits.

Pseudonymous user chud.eth accused the team allegedly retained an “undisclosed 60% fee” that was not properly segregated from the strategies it supposedly secured.

Stream answered that the intention “was for these funds to always be used as an insurance fund”, citing internal communications and investor updates, but acknowledging that they were not “as transparent as we should be in terms of the operation of the insurance fund”.

Elixir, the largest single creditor of the protocol, he tweeted has “full redemption rights at $1 with Stream for its loan position” and is “initiating the process of clearing its loan position.”

“The reported $93M Stream Finance incident is another reminder that operational risk extends beyond smart contracts,” Deddy Lavid, co-founder and CEO of blockchain security company Cyvers, said. Decrypt. “Even when protocols are secure, external fund managers, off-chain custody and human oversight remain critical weaknesses.”