The implosion of Stream Finance has sparked an algorithmic stablecoin crisis, leading to a $10 billion capital flight from the DeFi market and a collapse of xUSD to $0.11.

The Crisis Unfolds
On November 7, 2025—before the crypto market had fully recovered from October's volatility—a perfect storm centered around stablecoins swept through the DeFi ecosystem. Over the past week, yield-bearing stablecoins experienced their most severe outflow since the 2022 Terra/UST collapse, totaling $10 billion. This was not an isolated protocol failure but a chain of liquidations revealing deep structural flaws within modern DeFi.

The trigger was Stream Finance, once a highly sought-after stablecoin protocol. As the dominoes fell, it became clear that risks in DeFi's intricate "Lego castle" could cascade through five or six layers, ultimately triggering a systemic crisis of confidence.

Two Worlds of Stablecoins: Understanding the Roots
To grasp this crisis, we must recognize the fundamental divide in the stablecoin landscape:

1. 100% Reserve-Backed Stablecoins (e.g., USDT, USDC): These rely on centralized entities' compliant operations and strong financial audits. Their value is backed 100% by highly liquid real-world assets (cash, government bonds, commercial paper). They offer genuine stability and redemption confidence but sacrifice the core ethos of decentralization.

2. Algorithmic Stablecoins (Broad Definition): This is a different world. Whether issued via over-collateralized loans or more complex synthetic mechanisms, if their core collateral is cryptocurrency, their stability depends on algorithms and on-chain contracts. The protagonists of this crisis, xUSD and deUSD, belong to this category.

This crisis was an extreme demonstration of the inherent fragility of the second type.

The Death Spiral: The Inevitable Fate of Algorithmic Stablecoins
The greatest vulnerability of algorithmic stablecoins is their dependence on the price of the underlying crypto collateral. During market downturns, this can trigger a fatal "Death Spiral":

• The price of the crypto collateral (Base Asset) plummets.

• The stablecoin loses market confidence due to insufficient collateral, its face value drops, and it de-pegs.

• Over-collateralization ratios of 200% or even 300% are rapidly eroded by the freefall in collateral value.

• The protocol is forced to trigger large-scale on-chain liquidations, selling the liquidated collateral at market prices.

• These sales further depress the collateral's price, triggering more liquidations...

This vicious cycle is a domino effect of DeFi liquidations, potentially fatal to the entire ecosystem.

From xUSD to Compound: A Systemic Collapse Barely Contained
This time, the death spiral was triggered by Stream Finance.

On November 3rd, Stream announced a $93 million loss caused by an off-chain fund manager and froze deposits and withdrawals. This instantly ignited market panic. Its stablecoin, xUSD, de-peged within hours, crashing from $1 to $0.11, wiping out over $5 billion in market value.

Since xUSD was a core collateral asset for Elixir Finance's stablecoin, deUSD, the collapse of xUSD directly caused deUSD's collateral value to plummet to zero, triggering a second wave of de-pegging.

The crisis then spread to major lending platforms like Morpho and Euler. Numerous positions using xUSD and deUSD as collateral instantly became bad debt, draining deposit pools, sending interest rates to extreme negative values, and freezing depositor funds.

At this critical juncture, the entire DeFi world held its breath, watching the industry's cornerstone—Compound. As one of the largest lending protocols, Compound also had markets exposed to the fallout. If Compound's liquidation mechanism failed or it succumbed to massive bad debt, the consequences would be unthinkable.

Fortunately, the Compound team acted swiftly, emergency-shutting affected markets. This decisive move, akin to "cutting off a limb to save the body," prevented the further spread of cascading liquidations. This action temporarily stabilized the situation, barely containing a potential systemic disaster that could have engulfed all of DeFi within manageable limits.

We must soberly recognize: had Compound also suffered severe liquidations, its impact would have far exceeded the 2022 UST collapse, directly shaking the foundations upon which the DeFi world is built.

Reflection and Outlook: The Original Purpose and Future of Stablecoins
In the wake of this crisis, we must not only review technical risks but also question a fundamental issue: Was the original intent behind creating these on-chain algorithmic stablecoins flawed from the start?

Examining the failed protocols reveals that most were not built to serve real-world use cases. Their existence seemed solely to facilitate complex arbitrage games within the DeFi ecosystem. You almost exclusively find them nested within layered "DeFi matryoshka dolls," while they are absent in scenarios genuinely requiring stablecoins, such as payments, trading, or value storage.

These "stablecoins," which do not serve payment needs but are born for speculation and arbitrage, have always been hidden landmines within the DeFi ecosystem. They constructed a seemingly prosperous yet fragile house of cards, destined for catastrophic collapse at the slightest market tremor.

This forces us to rethink: What kind of stablecoin do we truly need?

What we hope to see is the stablecoin track returning to its core value—achieving genuine inclusive finance. The stablecoin of the future should be a tool that enables broader global access, particularly for the billions excluded from the traditional financial system, to use it borderlessly and permissionlessly. It should strive to reduce the cost of cross-border payments, protect personal assets from hyperinflation, and become a powerful force for individual empowerment.

This painful $10 billion lesson is not just a wake-up call about risk management. It is a powerful signal, urging the entire industry to step back temporarily from the frenzied "DeFi Lego" game and re-examine our goals. We need a financial future that is not only more technologically resilient but also returns to its original ideals, serving the broader well-being of humanity.

The implosion of Stream Finance has sparked an algorithmic stablecoin crisis, leading to a $10 billion capital flight from the DeFi market and a collapse of xUSD to $0.11.

The Crisis Unfolds
On November 7, 2025—before the crypto market had fully recovered from October's volatility—a perfect storm centered around stablecoins swept through the DeFi ecosystem. Over the past week, yield-bearing stablecoins experienced their most severe outflow since the 2022 Terra/UST collapse, totaling $10 billion. This was not an isolated protocol failure but a chain of liquidations revealing deep structural flaws within modern DeFi.

The trigger was Stream Finance, once a highly sought-after stablecoin protocol. As the dominoes fell, it became clear that risks in DeFi's intricate "Lego castle" could cascade through five or six layers, ultimately triggering a systemic crisis of confidence.

Two Worlds of Stablecoins: Understanding the Roots
To grasp this crisis, we must recognize the fundamental divide in the stablecoin landscape:

1. 100% Reserve-Backed Stablecoins (e.g., USDT, USDC): These rely on centralized entities' compliant operations and strong financial audits. Their value is backed 100% by highly liquid real-world assets (cash, government bonds, commercial paper). They offer genuine stability and redemption confidence but sacrifice the core ethos of decentralization.

2. Algorithmic Stablecoins (Broad Definition): This is a different world. Whether issued via over-collateralized loans or more complex synthetic mechanisms, if their core collateral is cryptocurrency, their stability depends on algorithms and on-chain contracts. The protagonists of this crisis, xUSD and deUSD, belong to this category.

This crisis was an extreme demonstration of the inherent fragility of the second type.

The Death Spiral: The Inevitable Fate of Algorithmic Stablecoins
The greatest vulnerability of algorithmic stablecoins is their dependence on the price of the underlying crypto collateral. During market downturns, this can trigger a fatal "Death Spiral":

• The price of the crypto collateral (Base Asset) plummets.

• The stablecoin loses market confidence due to insufficient collateral, its face value drops, and it de-pegs.

• Over-collateralization ratios of 200% or even 300% are rapidly eroded by the freefall in collateral value.

• The protocol is forced to trigger large-scale on-chain liquidations, selling the liquidated collateral at market prices.

• These sales further depress the collateral's price, triggering more liquidations...

This vicious cycle is a domino effect of DeFi liquidations, potentially fatal to the entire ecosystem.

From xUSD to Compound: A Systemic Collapse Barely Contained
This time, the death spiral was triggered by Stream Finance.

On November 3rd, Stream announced a $93 million loss caused by an off-chain fund manager and froze deposits and withdrawals. This instantly ignited market panic. Its stablecoin, xUSD, de-peged within hours, crashing from $1 to $0.11, wiping out over $5 billion in market value.

Since xUSD was a core collateral asset for Elixir Finance's stablecoin, deUSD, the collapse of xUSD directly caused deUSD's collateral value to plummet to zero, triggering a second wave of de-pegging.

The crisis then spread to major lending platforms like Morpho and Euler. Numerous positions using xUSD and deUSD as collateral instantly became bad debt, draining deposit pools, sending interest rates to extreme negative values, and freezing depositor funds.

At this critical juncture, the entire DeFi world held its breath, watching the industry's cornerstone—Compound. As one of the largest lending protocols, Compound also had markets exposed to the fallout. If Compound's liquidation mechanism failed or it succumbed to massive bad debt, the consequences would be unthinkable.

Fortunately, the Compound team acted swiftly, emergency-shutting affected markets. This decisive move, akin to "cutting off a limb to save the body," prevented the further spread of cascading liquidations. This action temporarily stabilized the situation, barely containing a potential systemic disaster that could have engulfed all of DeFi within manageable limits.

We must soberly recognize: had Compound also suffered severe liquidations, its impact would have far exceeded the 2022 UST collapse, directly shaking the foundations upon which the DeFi world is built.

Reflection and Outlook: The Original Purpose and Future of Stablecoins
In the wake of this crisis, we must not only review technical risks but also question a fundamental issue: Was the original intent behind creating these on-chain algorithmic stablecoins flawed from the start?

Examining the failed protocols reveals that most were not built to serve real-world use cases. Their existence seemed solely to facilitate complex arbitrage games within the DeFi ecosystem. You almost exclusively find them nested within layered "DeFi matryoshka dolls," while they are absent in scenarios genuinely requiring stablecoins, such as payments, trading, or value storage.

These "stablecoins," which do not serve payment needs but are born for speculation and arbitrage, have always been hidden landmines within the DeFi ecosystem. They constructed a seemingly prosperous yet fragile house of cards, destined for catastrophic collapse at the slightest market tremor.

This forces us to rethink: What kind of stablecoin do we truly need?

What we hope to see is the stablecoin track returning to its core value—achieving genuine inclusive finance. The stablecoin of the future should be a tool that enables broader global access, particularly for the billions excluded from the traditional financial system, to use it borderlessly and permissionlessly. It should strive to reduce the cost of cross-border payments, protect personal assets from hyperinflation, and become a powerful force for individual empowerment.

This painful $10 billion lesson is not just a wake-up call about risk management. It is a powerful signal, urging the entire industry to step back temporarily from the frenzied "DeFi Lego" game and re-examine our goals. We need a financial future that is not only more technologically resilient but also returns to its original ideals, serving the broader well-being of humanity.