Stream's xUSD decouples from $0.20! Understand how these protocols are "printing their own money"

Stream Finance reports a massive loss of $93 million, with xUSD decoupling from $0.20, and chain reactions rapidly spreading across multiple DeFi platforms! What’s the underlying mechanism behind all this? (Background recap: the stablecoin xUSD decoupled from $0.54, Balancer was hacked, leading to a collapse; additionally, USDe decoupled to a low of $0.65 overnight, exposing the fragility of synthetic stablecoins through chain liquidations.)

On November 4th, Stream Finance announced that external fund managers caused approximately $93 million in user asset losses and temporarily paused all withdrawals and deposits. The closely related staked stablecoin, Staked Stream USD (xUSD), experienced a severe decoupling, dropping over 80% to around $0.20 at the time of writing.

Chain exposure is estimated at $300 million. A research team from Yields and More (YAM) conducted a dedicated investigation, revealing that direct debt and stablecoin exposure related to Stream Finance exceed $284 million. This involves platforms like Euler, Silo, Morpho, Gearbox, which hold Stream synthetic assets (xUSD, xBTC, xETH).

The report states that DeFi funds and curators like TelosC are exposed to about $123 million, and Elixir has lent approximately $68 million to Stream, accounting for 65% of its stablecoin backing. YAM also cautions that the list might be incomplete, and the actual affected vaults and stablecoin scales are still to be confirmed or acknowledged by the involved DeFi projects.

Elixir, the largest creditor, claims full rights to redeem its loan positions at $1 per Stream, and has begun unwinding loans. However, Stream says repayments are pending legal clarification on compensation and fund allocation.

As xUSD decouples and exposure lists expand, the key questions are: who will ultimately bear the losses, and what will be the liquidation order? These are the short-term market focal points.

Perhaps more interesting is how Stream managed to “print their own money.” DeFi developer @Schlagonia has written a detailed explanation:

TL;DR: Stream (xUSD) and Elixir (deUSD)—and possibly more projects—are recursively minting each other’s tokens to artificially inflate their TVL (Total Value Locked), creating a Ponzi-like structure we’ve not seen in a while.

(Note: For readability and platform character limits, all transaction hashes and addresses will be provided in subsequent posts for those who want to track them.)

Our investigation begins on Ethereum mainnet. Last night, a USDC fund was just transferred into Stream’s xUSD wallet (address 0x15).

Step 1: Transfer this USDC to another address controlled by Stream (0x33), for about $4.4 million.

Step 2: 0x33 places an order on Cow Swap to buy USDT, with the proceeds flowing to address 0x25.

Step 3: After receiving USDT, 0x25 uses its on-chain minting contract (0x69) to mint an equivalent amount of deUSD.

Step 4: 0x25 then transfers this deUSD back to 0x33, which subsequently sends it back to the main wallet 0x15.

Stream then bridges these deUSD across chains to AVAX, World Chain, or other Layer 2s with sdeUSD lending markets, using deUSD as collateral to borrow other stablecoins (like USDT or AUSD), then swaps back to USDC and bridges back to the mainnet.

Repeating this cycle once or twice, with varying amounts and lending markets, results in Stream continuously minting deUSD, using it as collateral to borrow stablecoins, and minting more deUSD. Yesterday, they did three rounds, minting roughly $10 million worth of deUSD.

While aggressive, this isn’t outright “scamming.”

Stage Two: Typical leverage loops usually just add the last collateral. But Stream has a “special ability”: their wallet receives all USDC used to mint their own stablecoin, xUSD, and they exploit this.

Using the last borrowed USDC, they recursively mint their own xUSD. Yesterday, with the same $1.9 million USDC, they minted about $14.5 million worth of xUSD.

This means: xUSD isn’t backed 1:1 with real reserves. The protocol itself holds the largest share of xUSD tokens. Currently, they control over 60% of circulating xUSD. If all this is from recursive minting, each xUSD might only be backed by roughly $0.40.

Why does this matter? Well, besides “holding” xUSD, its main use is in leverage cycles on platforms like Euler and Morpho. But who would lend hundreds of thousands of stablecoins to a token that’s essentially minted out of thin air?

The answer: Elixir. They happen to have an extra $10 million in USDT.

Step 1: Transfer this $10 million USDT to Elixir’s multisig wallet (0x73).

Step 2: Swap USDT for USDC via Cow Swap, sending the USDC to address 0x1b.

Step 3: Bridge the USDC to Plume Network, then transfer to Safe address 0xaF8.

Step 4: The Elixir Safe deposits USDC into Morpho’s market, which uses xUSD as collateral. This market is hidden in Morpho’s interface, with Elixir as the sole depositor. Over $70 million USDC is deposited, with about $65 million borrowed.

Soon, Stream will use its newly minted xUSD to borrow this USDC, bridge it back to the mainnet, and the cycle continues.

Interestingly, as I write this, they seem to have started a new round of operations, minting new deUSD again. While I haven’t fully analyzed it, it’s reasonable to assume that similar mechanisms are used to provide funding for other “stablecoin partners.”

The actual collateralization ratio of the entire system is hard to verify but is likely less than $0.10 backing each dollar of TVL.

In the end, when everyone can claim a 10-15% TVL growth overnight, who’s left holding the bag?