The aftershocks of the Balancer hack are not over yet—how will the depegging of Stream’s xUSD affect your assets?

Chainfeeds Guide:

The market is not doing well. Wishing you safety.

Source:

Author:

TechFlow

Opinion:

TechFlow: To understand the depegging of xUSD and which assets are implicated, we must first clarify why the issue spread from Balancer to Stream Finance. The trigger was the theft of over $100 million from the veteran DeFi protocol Balancer, which sparked panic across the market. Although Stream and Balancer are not directly related, as panic spread, many users began to withdraw funds from various protocols, making Stream a victim of a “bank run.” Essentially, Stream is a high-yield leveraged looping protocol: after users deposit funds, the protocol uses the money as collateral to borrow, then continues to use the borrowed funds as collateral to borrow again, and so on. In this way, an initial $100 million in assets could be magnified to $300 million or even more. According to official data, Stream used $160 million in deposits to leverage about $520 million in assets, with leverage exceeding 3x. When the market is stable, this model can indeed generate impressive returns, attracting a large number of users. However, once panic sets in and users start to withdraw funds en masse, the problem is exposed—Stream’s money is not in its own hands, but is instead layered in collateralized, recursive positions. To meet withdrawal demands, positions must be unwound layer by layer, debts repaid, and collateral redeemed—a complex, time-consuming process that depends on market liquidity. At this critical moment, Stream announced that an external fund manager reported approximately $93 million in assets missing. Already-panicked users instantly lost trust, and xUSD was massively dumped, dropping from $1 to about $0.27. This was not a technical issue, but a depegging caused by a collapse in confidence. The depegging of xUSD is not just Stream’s crisis—it could trigger even greater systemic risk. On-chain data shows that about $285 million in loans are collateralized with assets issued by Stream, such as xUSD, xBTC, and xETH. If these collaterals become worthless, the resulting bad debt could spread to multiple lending platforms. Simply put, xUSD is an “I owe you dollars” voucher; under normal circumstances, it can be used as collateral for loans, but when xUSD falls from $1 to $0.3, your $1 million collateral is actually only worth $300,000, yet you borrowed $500,000, leaving a $200,000 loss for the system. What’s more problematic is that many lending protocols use hardcoded oracles to assess collateral value, meaning that even if the market price has crashed, the system still considers xUSD to be worth $1, preventing timely risk liquidation and turning it into a ticking time bomb. On-chain analysis shows that the largest exposed victim is TelosC, with an exposure of up to $123.6 million, involving multiple lending markets on Ethereum mainnet and the Plasma chain; if xUSD goes to zero, these investors will suffer huge losses. The second largest risk point is Elixir’s decentralized stablecoin deUSD, which lent $68 million to Stream, accounting for 65% of deUSD’s reserves. Although Elixir claims to have “1:1 redemption rights,” Stream has stated that payments cannot be made until legal investigations are complete, effectively freezing most of the assets. Other fund managers are also implicated, such as MEV Capital, Varlamore, and Re7 Labs, all of whom hold large amounts of xUSD or related exposure on different chains. The problem is not a single protocol being hacked, but rather upstream risk exploding, downstream protocols passively bearing the consequences, and capital chains being mutually bound—one break can trigger a chain reaction of collapses. To understand the essence of this crisis, it can be compared to the 2008 subprime mortgage crisis: on the surface, it was collateral assets failing, but fundamentally it was the result of excessive leverage and compounded systemic risk. Stream’s amplification of $160 million to $520 million makes TVL look high, but in reality, it’s just the same money being cycled and double-counted across different protocols, creating an illusion of inflated TVL. Once the market turns sour, all leverage turns against itself. The subprime crisis unfolded as: mortgage defaults → CDO collapse → financial institution failures → global crisis; the on-chain path this time is: Balancer hacked → market panic → Stream bank run → xUSD depegging → collateral assets wiped out → lending protocol bad debts erupt. In the DeFi world, without regulation or insurance, there is no lender of last resort—only natural capital liquidation. Lending protocols are highly dependent on trust; once confidence breaks, the speed of a bank run far exceeds that of traditional finance. Even more deadly, many risks are invisible beforehand, and users may not even know how many layers their funds have been rehypothecated. Stream’s problem is not a hacker attack, but that its model itself exposes fatal weaknesses in a liquidity crisis—high yields rely on high leverage, and when high leverage meets a black swan, it can go to zero in an instant. In the coming days, we may see more protocols announce losses due to insufficient collateral, unrecoverable funds, or failed liquidations. The current market environment is neither good nor forgiving. I hope that while pursuing returns, you do not overlook risk: in the decentralized world, there is no regulation, no insurance, no central bank backstop—your only final line of defense is yourself. May you weather the eye of the storm safely.