Another doomsday for Algorithmic Stablecoin: Stream Finance triggers a $1 billion chain liquidation, is DeFi heading towards a collapse of trust?

Original title: Stream Finance's collapse triggers $1 billion capital outflow, is DeFi facing its darkest week in history?

Original Author: Liu Ye Jing Hong

Source:

Reprint: Daisy, Mars Finance

November 7, 2025 - The crypto market has yet to fully recover from the severe turbulence of October 11, and a perfect storm triggered by stablecoins is sweeping through the entire Decentralized Finance world at an astonishing pace. Over the past week, we have witnessed the most intense outflow of funds from yield-generating stablecoins since the 2022 Terra/UST collapse, totaling up to $1 billion. This is not just an isolated protocol failure, but a chain liquidation that reveals deep structural cracks in the modern DeFi ecosystem.

The trigger point of the event was Stream Finance, a once-coveted stablecoin protocol. However, when the dominoes began to fall, we realized that any risk could propagate down five or six layers in this intricately complex Lego castle of Decentralized Finance, ultimately triggering a systemic crisis of trust.

The Two Worlds of Stablecoins: Understanding the Roots of the Crisis

To understand the essence of this crisis, we must first recognize the fundamental differences that exist in the field of stablecoins. Currently, stablecoins can be broadly divided into two main categories:

1. 100% reserve-backed stablecoins: Represented by USDT and USDC, they rely on the compliance operations of centralized institutions and robust financial audits. Their value is 100% backed by highly liquid assets in the real world (such as cash, government bonds, commercial paper). These stablecoins provide genuine “stability” and confidence in rigid redemption, but at the cost of sacrificing the core principle of decentralization.

2. Algorithmic stablecoins (in a broad sense): This is a completely different world. Whether it is generated through over-collateralized lending or through more complex synthetic mechanisms, as long as its core collateral is cryptocurrency, its stability mechanism relies on algorithms and on-chain contracts. The protagonists of this event, xUSD and deUSD, belong to this category.

The outbreak of this crisis is an extreme demonstration of the inherent fragility of the second type of stablecoin.

Death Spiral: The Fate of Algorithmic Stablecoins

The biggest Achilles' heel of algorithmic stablecoins lies in their dependence on the price of the cryptocurrency used as collateral. During market downturns, it is easy to trigger a deadly “death spiral”:

The price of crypto assets (Base Asset) used as collateral plummets → Stablecoins lose market confidence due to insufficient collateral, causing a drop in face value and leading to a de-pegging → The originally high over-collateralization rates of 200% or even 300% are rapidly eroded in the face of the free fall of collateral prices → The protocol is forced to trigger large-scale on-chain liquidations, selling the collateral to be liquidated at market prices → The selling behavior further suppresses the price of the collateral, triggering more positions to be liquidated…

This is a vicious cycle, a domino effect of decentralized finance liquidations. Once it occurs, it will be a fatal blow to the entire ecosystem.

From xUSD to Compound: A Systemic Collapse That Was Reluctantly Contained

This time, the trigger of the death spiral was pulled by Stream Finance.

On November 3rd, Stream announced that its off-chain fund manager caused a loss of $93 million and froze deposits and withdrawals. This news instantly ignited panic in the market. Its stablecoin xUSD depegged within hours, with the price plummeting from $1 to $0.11, resulting in over $500 million in market capitalization evaporating.

As xUSD is one of the core collateral assets of Elixir Finance's stablecoin deUSD, the collapse of xUSD directly caused the collateral value of deUSD to drop to zero, triggering a second round of de-pegging.

Subsequently, the crisis spread to mainstream lending platforms such as Morpho and Euler. A large number of positions using xUSD and deUSD as collateral instantly turned into bad debts, the deposit pools were emptied, interest rates became extremely negative, and depositors' funds were frozen.

At this critical moment, the entire Decentralized Finance world held its breath, focusing on the cornerstone of the industry—Compound. As one of the largest leading lending protocols, Compound also has affected markets. If Compound's liquidation mechanism is breached or it falls into crisis due to excessive bad debts, the consequences would be unimaginable.

Fortunately, the Compound team acted swiftly, urgently shutting down some affected markets with a resolute determination to avoid further escalation of the chain liquidation. This decisive measure temporarily stabilized the situation, barely containing a systemic disaster that could engulf the entire Decentralized Finance.

We must be fully aware that if Compound also suffers liquidation, its impact will far exceed the UST collapse of 2022; it will directly shake the foundations on which the DeFi world exists.

Reflection and Outlook: The Original Intention and Future of Stablecoins

After this crisis, we not only need to review the technical risks but also question a fundamental issue: Was there a problem with the original intention of these on-chain algorithmic stablecoins from the very beginning?

Examining these collapsed protocols, we find that most of them are not designed for real use cases. Their existence seems to be solely for engaging in complex arbitrage games in the world of Decentralized Finance. You can hardly see them except within the layers of nested “DeFi dolls,” while in actual scenarios that require stablecoin payments, transactions, or value storage, they are nowhere to be found.

These do not serve the payment scenario, but rather are “stablecoins” born for speculation and arbitrage, which have always been hidden landmines in the DeFi ecosystem. They create a seemingly prosperous, yet inherently fragile, house of cards that can lead to catastrophic collapse once the market is shaken.

This forces us to rethink what kind of stablecoin we really need.

What we hope to see more is that the stablecoin sector can return to its core value - to achieve true inclusive finance. The future stablecoins should be a tool that allows a wider range of global users, especially the billions of people excluded from traditional financial systems, to use it without borders and without permission. It should be dedicated to reducing the costs of cross-border payments, protecting personal assets from the erosion of malicious inflation, and becoming a powerful force that empowers individuals.

This billion-dollar painful lesson is not just a wake-up call about risk management. It is also a strong signal calling for the entire industry to temporarily step back from the crazy “DeFi Lego” game and reassess our goals. What we need is a financial future that is not only more resilient in terms of technology but also returns to the original intention of serving the broader human welfare.