Recently, the DeFi community has been on edge, with many veteran players warning of the risks and many people giving up on short-term high interest rates and migrating their assets from various emerging DeFi protocols to safer protocols.

The story begins on November 4th with the flash crash of the yield-generating stablecoin xUSD. This not only brought its issuer, Stream, to a standstill, resulting in the loss of $93 million, but also triggered a chain reaction of bad debts that swept through major lending protocols like Morpho and Euler, reaching a total exposure of $285 million. This also brought the low transparency risks of the CeDeFi model and the incentive structure issues associated with Curators to the forefront.

A $93 million loss triggered $285 million in bad debts.

Stream's yield-generating stablecoin xUSD experienced a catastrophic de-pegging, causing the platform to suspend all deposit and withdrawal services and triggering a $285 million bad debt crisis in the DeFi market. This incident also exposed a long-standing structural trap in the industry: CeDeFi (a hybrid model of centralized and decentralized finance) packages opaque high yields as low-risk stablecoins and transforms single risks into systemic risks through the Curator mechanism of mainstream lending protocols.

Stream's crisis began when an external fund manager reported approximately $93 million in asset losses. The platform immediately suspended all deposits and withdrawals and hired the law firm Perkins Coie to investigate. Following this news, xUSD experienced a sharp destabilization during a panic sell-off, rapidly falling from $1 to $0.23, and subsequently plummeting further to a low of $0.08.

The timing of this incident is quite sensitive. Omer Goldberg, founder of Chao Labs, stated that the xUSD de-pegging occurred immediately after the over $100 million vulnerability incident on the well-known DEX Balancer. Although Stream's losses may not be directly related to the Balancer hack, this demonstrates the high degree of interconnectedness within the DeFi ecosystem. A negative event in one protocol can quickly trigger a chain reaction in other protocols through market sentiment and collateral.

Following xUSD's depegging, several stablecoins with linked transactions or similar mechanisms quickly went to zero. Elixir had lent $68 million in USDC to Stream, representing 65% of its total reserves in the stablecoin deUSD, while Stream used its own stablecoin xUSD as collateral. When xUSD fell by 65%, the backing assets of deUSD evaporated almost instantly, triggering a liquidity run. Affected by market panic, stablecoins unrelated to xUSD/deUSD but employing similar mechanisms, such as fastUSD and USDX, also severely depegged and headed towards zero.

Even USDe, the leading synthetic stablecoin, has been affected, with its market capitalization dropping by about 8% in the past week, and the overall stablecoin market shrinking by more than $2 billion.

The collapse of xUSD also exposed the bad debt exposure of mainstream lending protocols, with major victims including lending protocols using the Curator mechanism such as Morpho and Euler. Data released by YAM shows that the total collateralized debt exposure associated with Stream amounted to approximately $285 million.

This crisis has exposed two major problems in the DeFi market: First, under the hybrid structure of CeDeFi, high returns mask the risks of information asymmetry; second, the Curator mechanism, as a bridge for risk allocation, rapidly amplifies the collapse of an opaque single asset into systemic bad debts across protocols.

CeDeFi's opaque practices create a high-yield trap for stablecoins.

Stream's xUSD de-pegging is a typical example of the structural risks that have emerged in CeDeFi. The essence of this type of model lies in combining the token synthesis capabilities of DeFi with the high risks and opaque yield strategies of CeFi (centralized finance).

xUSD is not a traditional stablecoin fully backed by US dollar fiat currency; rather, it is a type of "yield-generating" stablecoin. Its anchoring does not depend on asset reserves, but rather on a yield-generating investment portfolio. This portfolio typically includes collateral deployed in the DeFi lending market, LP positions, and off-chain capital managed by an external asset manager.

The inherent risk of the CeDeFi model lies in information asymmetry. Stream claims a TVL (Total Value Locked) of approximately $500 million, but on-chain tracking tools such as DeBank can only track about $150 million, revealing that the platform is engaging in "black box operations" by transferring a large amount of user funds to off-chain trading strategies.

The core value of DeFi lies in "trust minimization." Users trust the protocol code, not human intervention. Stream, however, places one of its core profit-generating processes off-chain and relies on external managers to report profits and losses. If the off-chain manager incurs losses, centralized risks will flow back to the decentralized system.

Although xUSD is positioned as a "Delta-neutral" stablecoin, aiming to reduce market volatility through hedging, it is essentially more like a "tokenized hedge fund." The approximately $93 million in losses disclosed by the external fund manager indicate that Stream, while pursuing high returns through off-chain trading strategies, engaged in extreme leverage practices that violated the "neutral" trading principle. This case also demonstrates how CeDeFi can create the illusion of a "high-yield stablecoin" through opaque operations.

Curator incentive structure mismatch exacerbates risk.

The Curator mechanism was initially designed to improve capital efficiency and develop professional strategies, but the xUSD de-pegging incident exposed the problem that if Curator itself is not properly managed, it may become a "risk amplifier" when a crisis breaks out.

Curators primarily exist within next-generation DeFi lending protocols such as Morpho and Euler. They are individuals or teams responsible for designing, deploying, and managing specific "strategy vaults." These vaults package complex yield strategies, allowing ordinary users to deposit funds with a single click and earn interest.

The core feature of the Curator mechanism is its non-custodial nature. Curator cannot directly access user funds; user assets are always held in custody by smart contracts, and users are limited to configuring and executing policy operations through protocol interfaces.

Although Curators' authority is restricted by the agreement, their profit model and incentive structure sow the seeds of amplified risk. Their income mainly consists of performance-based revenue sharing and management fees. This performance-driven incentive structure could potentially lead Curators to adopt more aggressive strategies, or even introduce high-risk assets, in pursuit of higher returns.

Essentially, this structure is similar to hedge funds in traditional finance, but lacks the corresponding regulatory and compliance oversight. In the DeFi environment, if a trading strategy fails, the losses will be borne by the users who deposited the funds, while Curator may have already earned a share of the high returns from the initial investments.

In the xUSD de-pegging incident, Curator's lax risk control amplified the risk particularly significantly. Through Curator's vault strategy, stablecoins with low transparency like xUSD were directly included in the collateral lists of mainstream lending protocols. Looking at Stream's list of victims, it was precisely because some Curators, such as MEV Capital and Re7, ignored the risks of xUSD and allocated their funds to related asset pools that tens of millions of dollars in bad debts occurred, transforming a single asset collapse crisis into a systemic risk.

CeDeFi requires on-chain verifiability, and Curator requires shared interests.

The Stream debacle serves as a stark reminder to the industry that the innovative boundaries of DeFi are challenging its decentralized principles. To build a sustainable ecosystem, the industry must confront the transparency pitfalls of the CeDeFi model and the incentive structure mismatch issues of the Curator mechanism.

The de-pegging of xUSD and the resulting bad debts on mainstream lending protocols like Morpho and Euler are further evidence of the CeDeFi space's failure to strike a balance between pursuing high returns and sacrificing transparency. High returns are often a disguise for complexity, low transparency, and centralized risks.

When DeFi protocols introduce synthetic stablecoins as collateral, they inherit the risks of mismanagement and information asymmetry inherent in CeFi. The key to solving this problem lies in risk isolation and mandatory transparency.

1. Risk isolation and stratification: Lending agreements should require Curator to set stricter risk parameters for synthetic assets, or to completely isolate them in a vault with more conservative risk parameters, separate from other mainstream assets.
2. Mandatory transparency standards: For synthetic stablecoins whose yields rely on off-chain transaction strategies, mandatory disclosure of auditable, real-time proof-of-reserve information and asset allocation should be required. Relying solely on smart contracts is insufficient to guarantee security; the system should integrate risk isolation and accountability mechanisms.

The original intention of the Curator mechanism was to improve capital efficiency, but in the absence of effective accountability and low transparency, it can easily become a shortcut to embed low-liquidity, high-risk assets into mainstream DeFi, thereby turning single-point risks into systemic bad debts.

Curator's future will depend on whether the mechanism itself can effectively balance capital efficiency and moral hazard. Protocol governance should adopt more robust measures to mitigate its incentive structure problems.

1. Introducing a collateral penalty mechanism: The lending agreement should require Curator to pledge a significant amount of their own assets and establish a clear penalty mechanism. If Curator incurs bad debts due to inappropriate strategies or risk control failures, the agreement should forfeit their pledged assets to cover part of the losses. This will also force Curator to align their motivation to pursue high returns with their responsibility for users' principal.
2. Enhance transparency and third-party verification: The agreement should mandate Curator to fully disclose its strategy models, risk exposures, and the real-time status of underlying assets, and introduce an independent third-party risk management institution to verify Curator's model data, rather than relying on Curator's own statement.

Ethereum founder Vitalik Buterin pointed out in a blog post that a greater focus on low-risk DeFi would allow the market to better maintain the stability of the ecosystem economically. As he stated, the industry urgently needs protocols and Curators that respect risk.

PANews argues that even though the Stream collapse caused significant losses for some Curator users, and led to the collapse of four other stablecoins, the market should not completely deny yield-generating stablecoins and the Curator mechanism , or even shift the blame to lending protocols like Morpho and Euler. Many projects and Curator were collateral damage; they themselves are also "victims."

From a positive perspective, the market is currently in a risk-clearing phase. During this process, users can identify Curators and protocols that respect risk and possess genuine value. In the past week, four stablecoins have gone to zero, despite having numerous associated protocols or counterparties. However, Curators like Gauntlet and SteakhouseFi have effectively mitigated risk and avoided a chain reaction of crises. Furthermore, stablewatch data shows that while protocols such as Reservoir, YieldFi, and Coinshift experienced significant capital outflows and sharp declines in TVL, their issued stablecoins have maintained their pegs. PANews believes that both yield-based stablecoins and the Curator mechanism have their value and necessity; however, the industry needs to develop a more robust system to further improve them.

For investors, due diligence should be more in-depth: it should not only assess the security of the protocol code, but also judge the reputation, policy transparency, and robustness of the underlying assets of the Curator it integrates with. The future of the industry depends on whether it can eliminate the opaque operations in the CeDeFi model through technological means and a more rigorous governance structure, and establish a safer, more sustainable, and more transparent DeFi ecosystem.