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

In brief

Stream Finance announced that an external fund manager lost approximately $93 million in user assets, triggering an immediate suspension of all withdrawals and deposits.
Staked Stream USD (xUSD) crashed from its $1 peg, falling about 77% following the announcement.
DeFi research group Yields and More identified nearly $285 million in direct debt exposure across multiple lending protocols.

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

The protocol announced it has suspended all withdrawals and deposits while engaging law firm Perkins Coie to investigate the incident and determine creditor priorities.

“We are actively withdrawing all liquid assets and expect this process to be completed in the near term,” Stream Finance wrote on X.

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

The loss caused Staked Stream USD (xUSD) to depeg soon after, rapidly plummeting to approximately $0.50, according to blockchain security firm PeckShield. At the time of writing, CoinGecko data shows xUSD trading at just $0.26, a 77% drop over the past 24 hours.

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

“It’s unclear how this will be settled in between xUSD/xBTC/xETH holders and lenders against these tokens,” YAM warned. xBTC and xETH are Stream’s yield-bearing wrapped versions of Bitcoin and Ethereum that, like xUSD, were used as collateral across DeFi lending markets.

The team noted stablecoins with indirect exposure include Elixir’s deUSD, which had lent 68 million USDC to Stream, representing 65% of its backing, and Treeve’s scUSD through complex rehypothecation chains.

Rehypothecation chains are when collateral gets used multiple times across different lending platforms, creating a cascading effect.

The collapse comes days after anonymous on-chain trader “Cbb0fe” warned Stream’s on-chain data reportedly showed xUSD’s supporting assets at only approximately $170 million while borrowing reached $530 million, a leverage ratio exceeding 4x through the protocol’s “recursive looping” strategy.

Decrypt has 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 in interest rates,” Stream explained in a recent post defending the strategy.

However, controversy erupted when users discovered Stream had been allegedly accumulating an undisclosed “insurance fund” from profits.

Pseudonymous user chud.eth accused the team of allegedly retaining a “60% undisclosed fee” that wasn’t properly segregated from the strategies it supposedly insured against.

Stream responded that the intention “was for these funds to always be used as an insurance fund,” citing internal communications and investor updates, but acknowledged they have not been “as transparent as we should have been on how the insurance fund works.”

Elixir, the protocol’s largest single creditor, tweeted it has “full redemption rights at $1 with Stream for its lending position” and is “beginning the process of unwinding its lending 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 firm Cyvers, told Decrypt. “Even when protocols are secure, external fund managers, off-chain custody, and human oversight remain critical weak points.”