"Largest outflow since the Luna incident"... DeFi 'cascading collapse theory' spreads

Spread of aftereffects from Stream Finance suspension of deposits and withdrawals

Largest capital outflow since the Luna incident

"DeFi vulnerabilities exposed... may transfer to exchanges"

Concerns about a liquidity crisis caused by large-scale liquidations are spreading across the decentralized finance (DeFi) market. Some major protocols have suspended deposits and withdrawals, and stablecoin outflows have surged, causing instability across the market.

The trigger for this incident was Stream Finance's sudden suspension of deposits and withdrawals on the 3rd (local time). This is reported to be the aftermath of an external fund manager's operational loss (about 93 million dollars) that occurred on the 11th of last month amid increased market volatility. The industry warns that if the Stream incident spreads across DeFi, it could escalate into a system risk of up to 8 billion dollars.

DeFi research firm Yields and More said in a report, "Stream Finance's direct debt exposure amounts to up to 285 million dollars," diagnosing that "this is not a single protocol issue but shows a complex contagion structure across the DeFi ecosystem."

The hardest hit is Elixir, one of Stream Finance's major lenders. Elixir lent Stream Finance up to 68 million dollars worth of USDC, which corresponds to about 65% of its total holdings of the stablecoin deUSD. Another partner, RE7 Labs, also suffered losses. RE7 accepted Stream Finance-related assets (xUSD, Elixir token 'ELX', etc.) as collateral in vaults across several lending protocols, leaving it exposed to the risk of non-performing loans amounting to millions of dollars.

The broader spread is occurring through a "double collateral" structure. Stream Finance's 'Staking Stream USD (xUSD)' is staked in major lending protocols such as Euler, Silo, and Morpho, and these protocols are in turn connected to other protocols. In such a web-like financial structure, industry analysis says the failure of a single node can quickly transfer to other protocols.

Yields and More warned, "The risks revealed by the liquidation event on October 11 have expanded far beyond Stream Finance," adding, "There will be many additional liquidity pools and protocols affected."

According to StableWatch, 1 billion dollars flowed out of yield-bearing stablecoins last week. This is the largest scale since the 2022 Terra–Luna incident. Stream Finance's xUSD recorded a 93 million dollars loss, and Coinshift's csUSDL saw deposits (TVL) plunge 95% to 1.92 million dollars. Elixir's deUSD and sdeUSD are also experiencing liquidity shortages.

In the market, views are spreading that this is not a simple temporary liquidity shortage but a structural vulnerability of the DeFi ecosystem. An industry source warned, "The currently revealed 100 million dollars loss may be the tip of the iceberg," adding, "Transparency, collateral structure, and leverage management in the DeFi market will be key to future crisis response."

David Bailey, chairman of Bitcoin Magazine, pointed out, "A credit crisis that started in the DeFi lending sector could spread into a liquidity crisis across the crypto asset market," noting, "If collateral shortfalls or hedge failures occur, there is also a possibility that the crisis could transfer from DeFi to centralized finance (CeFi)." He added, "At this point, risks should be minimized and preparations should be made for additional cascading liquidation events."