A major incident at Stream Finance has caused its Staked Stream USD (xUSD) stablecoin to lose its dollar peg, sending shockwaves through the decentralized finance (DeFi) ecosystem. The token plummeted to approximately $0.50 shortly after the loss was reported, according to blockchain security firm PeckShield. At the time of writing, data from CoinGecko shows xUSD trading at just $0.26, a 77% collapse over the past 24 hours.

Over $285 Million in Debt Exposed

The fallout has revealed significant vulnerabilities across multiple lending protocols. DeFi research group Yields and More (YAM) identified nearly $285 million in direct debt exposure, affecting platforms such as Euler, Silo, Morpho, and Gearbox. Curators TelosC, Elixir, MEV Capital, and Varlamore were named among the most exposed creditors.

The risk extends beyond the stablecoin. YAM warned that it remains “unclear how this will be settled” for holders and lenders of xBTC and xETH. These assets, Stream’s yield-bearing wrapped versions of Bitcoin and Ethereum, were also widely used as collateral across DeFi lending markets.

Warnings Preceded the Collapse

The collapse may not have been a complete surprise. It follows a recent warning from an anonymous on-chain trader, “Cbb0fe,” who pointed out that Stream’s on-chain data showed a dangerously high leverage ratio. The analysis indicated that while the protocol had $530 million in borrowing, its supporting assets were only valued at approximately $170 million, achieved through a “recursive looping” strategy.

This risk was amplified by complex rehypothecation chains, where the same collateral is used multiple times on different platforms, creating a potential for cascading failures. This effect was seen with other stablecoins, including Elixir’s deUSD, which had lent 68 million USDC to Stream, representing 65% of its total backing.

Project and Creditors Respond

In a statement, the Stream Finance team claimed the funds involved were intended to “always be used as an insurance fund” but admitted they had not been “as transparent as we should have been on how the insurance fund works.”

Elixir, the protocol’s largest single creditor, announced that it has “full redemption rights at $1 with Stream for its lending position” and is “beginning the process of unwinding” its exposure.

The event serves as a critical lesson for the industry. “The reported $93M Stream Finance incident is another reminder that operational risk extends beyond smart contracts,” said Deddy Lavid, co-founder and CEO of blockchain security firm Cyvers.