The decentralized finance (DeFi) sector is facing a new liquidity concern after the security firm PeckShield issued an alert regarding several vaults on the Euler protocol. According to the warning, TelosC vaults launched on Euler have reached 100% utilization, effectively locking up user funds and preventing liquidity providers from making withdrawals.

Euler operates as a decentralized lending platform where users can deposit crypto assets to earn interest or borrow against collateral. Within this ecosystem, TelosC acts as a risk curator, managing specific liquidity vaults with their own rules for loans and yields. The current situation means that all available funds in these vaults have been loaned out, totaling approximately $27 million in potentially trapped assets. The funds are spread across several major cryptocurrencies, including $14.3 million in USDC, $7.3 million in WBTC, and $5.5 million in WETH.

Compounding the problem is an unusually low annual yield of just 0.18% for liquidity providers. This low return offers little incentive for borrowers to repay their loans promptly, suggesting that the liquidity could remain inaccessible for an extended period. If funds remain stuck, the DeFi ecosystem could face a chain reaction, including rising borrowing rates, liquidity shortages in connected pools, and forced liquidations that could impact the value of related synthetic tokens.

Fears of a New DeFi Contagion

Analysts suggest this event may be linked to the recent collapse of Stream Finance, a DeFi protocol that had integrations with TelosC. Earlier this week, Stream Finance suspended all operations after an external fund manager reported an exploit resulting in losses of around $93 million.

The situation on Euler adds to a growing list of concerns that could fuel a wider DeFi contagion. Other recent major incidents include a $128 million exploit on the Balancer protocol and the collapse of the xUSD stablecoin, which saw its value plummet from $1 to $0.35.

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