Stream Finance reports a loss of 93 million! Elixir suspends deUSD trading and commits to a 1:1 redemption.

Due to earlier liquidation operations by Stream Finance this week that resulted in losses, Elixir has decided to halt its trading of the synthetic US dollar stablecoin deUSD. The protocol has processed redemptions for 80% of deUSD holders. On November 4th, after external fund managers disclosed a loss of $93 million, the DeFi protocol Stream Finance suspended withdrawals.

Stream Finance Loss of $93 Million Sparks Stablecoin Crisis

(Source: CoinGecko)

On November 4th, after external fund managers revealed a $93 million loss, Stream Finance paused withdrawals. This event quickly triggered a chain reaction within the DeFi ecosystem, affecting multiple protocols and stablecoins connected to Stream Finance. The protocol owes at least $285 million to several lending institutions, including over $68 million owed to Elixir, with substantial amounts owed to other decentralized lending platforms like Euler, Morpho, and Compound.

Stream Finance’s business model involves borrowing stablecoins to engage in leveraged trading and yield strategies. It borrows deUSD to support its own stablecoin, xUSD, which is currently trading below $0.20, indicating a severe depeg. This depegging is causing further ripple effects elsewhere, most notably the collapse of Stable Labs’ USDX token. USDX was also a dollar-pegged stablecoin, but because its collateral included xUSD, Stream Finance’s collapse directly led USDX to lose its value support.

The $93 million loss is unprecedented in the DeFi space. The amount approaches the total market cap of some smaller stablecoin projects before the Terra/Luna collapse in 2022. The specific reasons for the loss have not been fully disclosed, but the external fund managers’ disclosures suggest that high-risk leveraged trading strategies may have failed. In the current volatile market environment, over-leveraged strategies can quickly incur massive losses.

Stream Finance’s decision to suspend withdrawals further fuels panic. When users cannot withdraw funds, it often triggers a bank run mentality, even among long-term holders eager to exit. This psychology is especially pronounced in DeFi, where there is no traditional deposit insurance or lender-of-last-resort mechanism.

Elixir Emergency Halt of deUSD Trading to Protect Holders

Although Elixir shut down the minting and redemption infrastructure for deUSD on Thursday, it still plans to redeem 100% of deUSD holdings on a 1:1 basis. The project is working on establishing a claim portal, and reports indicate that it has taken snapshots of all remaining deUSD and sdeUSD holder balances. Snapshots are a common blockchain technique used to record the balances of all addresses at a specific moment, ensuring fair redemption later.

The project has decided to disable withdrawals via its existing portal, partly to “eliminate any risk of deUSD being liquidated before Stream repays its loans.” This decision demonstrates Elixir’s crisis management acumen. Without a pause, Stream Finance might sell large amounts of deUSD on the market to cover some debts, causing the price to plummet and harming all holders. By halting trading, Elixir effectively freezes the current state, buying time for an orderly liquidation.

In earlier posts, Elixir stated that it was the only creditor with a “full $1 redemption right” for Stream, but later indicated that Stream “has decided not to repay or liquidate.” This change in wording reflects the complexity of negotiations. Initially, Elixir may have believed its position as a primary creditor would ensure priority repayment, but Stream’s decision shows the situation is worse than expected.

“Elixir currently holds about 90% of deUSD supply (roughly $75 million), with a significant portion of its remaining backing coming from loans Morpho provided to Stream,” Elixir wrote on X (formerly Twitter). This data highlights the severity of the issue. If Stream Finance holds 90% of deUSD supply, it indicates that the stablecoin’s liquidity and stability are heavily dependent on a single entity, which is a major flaw in stablecoin design.

Design Principles and Real-World Challenges of deUSD

Elixir’s deUSD was launched in mid-2024, aiming to provide a “truly decentralized” non-custodial alternative to Ethena Labs’ USDe synthetic dollar. The asset gained prominence as collateral and even received backing from Hamilton Lane’s tokenized fund HLSCOPE. Hamilton Lane is one of the world’s largest alternative asset managers, and its endorsement lent traditional financial credibility to deUSD.

However, this crisis exposes inherent contradictions in the design of “decentralized stablecoins.” deUSD claims to be “truly decentralized” and “non-custodial,” but 90% of its supply is concentrated in a single borrower, which is far from decentralization. True decentralization should mean risk diversification, with no single entity capable of causing systemic threats.

Synthetic dollar stablecoins like deUSD and USDe operate differently from traditional fiat-backed stablecoins like USDC. They do not rely on 1:1 dollar reserves but maintain their peg through complex derivatives strategies. While these mechanisms can work well under normal conditions, they are vulnerable under extreme market stress.

Key Differences Between deUSD and Traditional Stablecoins

Collateral Model: deUSD uses a synthetic mechanism; USDC relies on fiat reserves.

Decentralization Level: deUSD claims decentralization but has high concentration.

Regulatory Status: deUSD is unregulated; USDC is regulated by New York State.

Transparency: deUSD is on-chain transparent but complex; USDC undergoes regular audits.

Elixir’s Liquidation Plan and 1:1 Redemption Promise

Elixir states it is currently working with other DeFi lending platforms like Euler, Morpho, and Compound, as well as treasury management entities, to liquidate its positions in Stream and distribute funds to deUSD holders. “We still believe we will be able to redeem at a 1:1 ratio,” Elixir said. This optimistic promise is especially important during a crisis, as it provides market confidence.

Liquidating Stream’s positions is a complex process. Stream’s borrowed deUSD is used across various DeFi strategies and dispersed across multiple protocols and pools. Elixir needs to coordinate with each to determine Stream’s holdings and execute an orderly liquidation. Mishandling this process could trigger panic and further price declines, reducing recoverable funds.

“deUSD remains fully backed, and Elixir is working directly with the Stream team to start unwinding their loan positions,” the statement added. “Any affected AMM pools or lending markets will be able to recover their full value.” This commitment covers not only direct deUSD holders but also users providing liquidity in AMM pools and lending markets.

Elixir reports that it has processed redemptions for 80% of deUSD holders, a positive sign. This suggests most users have successfully exited, while the remaining 20% may be temporarily unable to redeem. Their balances have been snapshot and can be claimed later at a 1:1 ratio for USDC.

However, whether the 1:1 redemption promise can be fulfilled remains uncertain. Elixir’s optimism is based on its valuation of Stream’s assets, but if Stream’s assets further devalue during liquidation or if the process is slow, the recovered funds might fall short of supporting full redemption. Legal proceedings could also intervene; if Stream Finance enters bankruptcy, the payout order and proportions for creditors like Elixir will be determined by courts.