Key Takeaways
- The Elixir protocol’s stablecoin, deUSD, lost nearly 98% of its value, dropping to a low of $0.03.
- Market analysts attribute the deUSD depeg to Elixir’s significant exposure to Stream Finance, a DeFi yield aggregator.
- Stream Finance recently reported a loss of nearly $100 million in user funds due to an exploit originating from a vulnerability in the Balancer protocol.
- Elixir has stated that it has processed redemptions for most deUSD holders but is unable to fully resolve the crisis due to Stream Finance holding the majority of the remaining supply.
deUSD Depeg Linked to Stream Finance Losses
Market observers believe the recent depeg of Elixir protocol’s deUSD stablecoin is a direct consequence of the protocol’s substantial exposure to Stream Finance. Stream Finance, identified as a DeFi yield aggregator, recently disclosed significant losses affecting user funds, with an external fund manager losing close to $100 million earlier this week.
Following this exposure, deUSD plummeted dramatically. Blockchain security firm PeckShield reported that the dollar-pegged stablecoin lost approximately 98% of its value, hitting an all-time low of $0.03 early Friday morning. This sharp decline underscores the fragility of stablecoins with concentrated collateral backing.
On-chain analysis from Nansen AI reveals that Elixir had allocated a significant portion of deUSD’s collateral to Stream Finance, reportedly around 65%. This concentration meant that the stablecoin’s peg was heavily reliant on Stream Finance’s ability to manage its investments effectively.
Stream Finance Exploit Triggers Stablecoin Crisis
The root cause of the deUSD’s dramatic collapse appears to stem from an exploit affecting Stream Finance. As previously reported, Stream Finance acknowledged that a fund manager responsible for its investments lost approximately $93 million in user assets. In response to the incident, the platform has temporarily suspended all withdrawals and deposits.
Stream Finance has engaged legal counsel from Perkins Coie LLP to conduct a thorough investigation into the massive loss. In an official statement on X last Tuesday, the platform stated, Until we are able to fully assess the scope and causes of the loss, all withdrawals and deposits will be temporarily suspended.
This suspension by Stream Finance left Elixir in a precarious position, unable to access a substantial portion of its collateral reserves. Despite claims of retaining redemption rights at $1 per token, a report from DeFi research collective Yields and More (YAM) indicated that Stream Finance informed Elixir that payouts would be contingent on legal determinations of creditor priority.
Technical Vulnerabilities in Balancer Impact Stream Finance
Further investigation into the Stream Finance incident points to technical flaws within the Balancer protocol, which was integrated into Stream’s liquidity strategy. Security auditing firm Decurity identified a vulnerability in Balancer’s internal swap logic, specifically within its batchSwap function. This bug reportedly allowed attackers to exploit a rounding-down flaw to drain funds.
The situation was exacerbated by a faulty access control mechanism in Balancer’s manageUserBalance function, coupled with a logic flaw in the validateUserBalanceOp process. These issues prevented proper verification of message senders, enabling unauthorized withdrawals through the UserBalanceOpKind.WITHDRAW_INTERNAL operation and providing attackers with a direct path to siphon assets from Balancer’s vaults.
This breach had significant repercussions for other assets linked to Stream, including Staked Stream USD (xUSD), which depegged and experienced a sharp price drop, falling to $0.50 and later to $0.14 within a single day, according to CoinGecko data.
Analysis by Yields and More highlighted substantial debt exposure for Stream across lending protocols such as Euler, Morpho, Silo, and Gearbox, totaling nearly $285 million. Key creditors affected by this situation include TelosC, Elixir, MEV Capital, and Varlamore, all of whom held significant collateralized positions intertwined with Stream’s operational activities.
With Stream holding nearly 90% of the loan positions tied to deUSD, its inability to repay Elixir or unwind collateral positions created a severe redemption crisis. This was further compounded as users rushed to exit the stablecoin, leading to a collapse in its value.
Evidence from blockchain data on Wednesday showed Stream’s wallets beginning to offload large volumes of deUSD on decentralized exchanges. PeckShield traced one specific wallet, identified as 0xcb4a7b790edb7fa3e2731efd7ed85275f92fc74a, as it sold considerable amounts of deUSD for USDT in Curve Finance pools.
This aggressive selling pressure caused deUSD’s price to initially drop from $1 to $0.40, before a brief recovery to $0.99. However, subsequent liquidations pushed the price further down to $0.03, effectively wiping out most of its market value. Param.eth, a contributor to zKPass and an ETH smart contract developer, suggested that this dumping activity on Curve was a desperate attempt by Stream or associated wallets to liquidate holdings before insolvency proceedings commence.
Elixir’s Response to Community Concerns
In the wake of the considerable depeg of its stablecoin deUSD, Elixir issued a statement on X late Thursday. The protocol asserted that it had successfully processed redemptions for approximately 80% of deUSD holders prior to the price collapse.
Elixir further explained that its capacity to address the ongoing devaluation is significantly limited because Stream Finance holds an estimated 90% of the remaining deUSD supply, valued at approximately $75 million. This concentration of holdings by a single entity is a key factor hindering a full resolution.
To protect the interest of these holders (and remove any risk of Stream liquidating deUSD before repaying their loan), a snapshot has been taken of all remaining deUSD and sdeUSD holder balances, and a claim page will go live later today, the protocol stated.
Elixir indicated that it is actively collaborating with other decentralized lending platforms, including Euler, Morpho, and Compound. The goal of these collaborations is to facilitate payouts to users and work towards restoring a degree of stability within its ecosystem.
We still believe this will be honored 1 for 1, Elixir communicated, expressing confidence that deUSD holders will ultimately receive full compensation for their holdings.
Final Thoughts
The deUSD depeg serves as a stark reminder of the interconnected risks within the DeFi ecosystem. Concentrated collateral exposure and vulnerabilities in underlying protocols can trigger cascading failures, impacting multiple projects and user assets.
While Elixir is actively working with other protocols to mitigate losses for remaining holders, the situation highlights the challenges in managing stablecoin depegs tied to significant external financial distress.