Article Summary
- Understanding the risks of high-yield stablecoins.
- Analyzing the xUSD collapse and its impact on the DeFi market.
- Highlighting the importance of transparency and governance in stablecoin projects.
- Examining the role of Curators in risk assessment and management.
- Comparing these risks to past financial crises.
Introduction
In the world of stablecoins, there is no shortage of stories, but what is lacking is respect for risk. In November, another problem emerged. A stablecoin called xUSD experienced a flash crash on November 4, falling from $1 to $0.26. It continued to fall, reaching $0.12, evaporating 88% of its market value. This event happened to Stream Finance, a project managing $500 million in assets. They packaged their high-risk strategies as a stablecoin xUSD, claiming to be "pegged to the dollar and automatically generating interest."
High-Risk Strategies and the Collapse
The essence is that their strategies involve risks. On October 11, when the crypto market crashed, their trading strategies failed, resulting in a loss of $93 million. A month later, Stream Finance announced the suspension of all withdrawals and deposits, leading to the de-pegging of xUSD. Panic spread quickly. According to data from the research firm stablewatch, in the following week, over $1 billion fled from high-yield stablecoins. This is equivalent to emptying all the deposits of a medium-sized commercial bank in 7 days. Warnings spread throughout the DeFi market, and in some protocols, borrowing rates reached -752%, meaning that collateral became worthless, no one paid back loans to redeem it, and the market entered chaos. All this stems from a seemingly beautiful promise: stability, with high interest.
The Mask of Stability
In the world of finance, beautiful masks often hide sharp fangs. Stream Finance and its stablecoin xUSD are an example of this. They claimed that xUSD uses a "Delta Neutral strategy." This is a complex term derived from the professional trading field, and aims to hedge against the risks of market fluctuations through a series of complex financial instruments, and sounds very safe and professional. In just a few months, it attracted up to $500 million in funds. However, upon removing the mask, analysis of on-chain data revealed many loopholes in the operation of xUSD. First, there is a great deal of opacity. Of their stated $500 million in assets, less than 30% can be tracked on-chain, and the remainder has been placed in unseen locations. Second, there is shockingly high leverage. The project used only $170 million in real assets to borrow, through repeated pledging and borrowing in other DeFi protocols, raising up to $530 million in loans, with real leverage of over 4 times. You are buying an LP share in a 4x leveraged hedge fund, and you can't see 70% of that fund. The "stability" you think is your money being traded frequently in the world's largest digital casino. This is where the greatest danger lies in this type of "stablecoin." It uses the label of "stability" to hide the essence of a "hedge fund."
The Role of Curators
In new lending protocols such as Morpho and Euler, Curators play the role of "fund managers." They are responsible for packaging complex DeFi strategies into "strategy vaults," allowing ordinary users to deposit and enjoy returns with one click. Their main income comes from extracting a certain percentage of performance fees from user returns. In theory, they should be professional risk gatekeepers, helping users screen high-quality assets. But the business model of performance fees also paves the way for pursuing high-risk assets. When Stream Finance appeared, it immediately became a target for many Curators.
Lessons Learned
This pattern of "packaging - expansion - collapse" is very similar to what has happened in financial history. Whether it was LUNA in 2022, or the global financial crisis of 2008, the essence is the same, which is packaging high-risk assets to make them look like low-risk products, and then selling them to investors who cannot fully understand the risks behind them. From Wall Street to DeFi, technology is changing, names are changing, but human greed has never changed. Currently, there are still more than 50 similar high-yield stablecoin projects operating in the DeFi market, with a total value exceeding $8 billion. The problem is that we gave these products the wrong name. The three words stablecoin bring an illusion of security, and a numbing of risk. When people see a stablecoin, they think of dollar reserve assets like USDC and USDT, not a high-leverage hedge fund. Before that, remember a simple rule: when a product needs to use a very high annual yield to attract you, it is certainly unstable.
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