Stream Finance (issuer of XUSD) has experienced a solvency crisis following concerns about the integrity of its balance sheet and self-proclaimed losses of $93M. Stream operates as an onchain, tokenized hedge fund that originally positioned itself as a delta-neutral, looping-focused fund and reached over $200M in deposits across chains.
A substantial portion of this capital was deployed recursively, depositing XUSD into lending markets and borrowing stablecoins against the same asset. As confidence deteriorated, widespread redemptions triggered a “run on the bank,” revealing that Stream Finance was unable to fully meet withdrawal obligations. As Stream’s leveraged positions were not unwound appropriately, select lending markets were left with borrowed amounts exceeding the value of the underlying XUSD collateral.
Ongoing Contagion Risk
Elixir: deUSD
Yesterday, the Elixir team announced deUSD redemptions and its exposure to Stream Finance. According to the Elixir team, Steam holds ~90% of the remaining deUSD supply, while Elixir holds a similar proportion of the remaining backing of xUSD as a loan to Stream. This is still an evolving situation as it appears Stream used the deUSD to borrow additional stables. If this loan is not able to be paid back, losses would be socialized among remaining deUSD holders.
While Elixir and deUSD were not deployed on Arbitrum, curators that are active on Arbitrum had impacted deUSD markets on other chains and its redemption has contributed to the liquidity crunch observed on lending protocols like Morpho, Euler, and Silo.
Stables Labs: USDX
Following Elixir, USDX also suffered a significant depeg yesterday. USDX is supposed to be a synthetic USD stablecoin backed by delta-neutral positions, but it is unclear if they are exposed directly to Stream Finance.
While there was ~$120M USDX on Arbitrum as of this week, to our knowledge there was only a single isolated market for USDX on Silo that stood at ~$12.5M before the depeg. This market was not a part of DRIP and has since been removed from the Silo frontend as a precaution from their team. Entropy is continuing to investigate USDX and its potential downstream impacts.
Impact on Arbitrum Ecosystem
Arbitrum Treasury Management Portfolio
The DAO’s treasury-managed positions remain fully solvent and have no direct exposure to XUSD-related activities. The Gauntlet USDC Prime Vault on Morpho is only exposed to the WBTC/USDC and wstETH/USDC markets. Its market size and liquidity have remained stable and unimpacted. The RWA and ETH strategies also remain unaffected.
Lending Market Exposure
Silo:
- ~$15M in bad XUSD debt
- Silo Varlamore USDC: ~$14M
- Silo (TID) Today in DeFi USDC: ~$400K
- ~$12.2M in potential exposure to USDX
Morpho: ~$700K in bad debt (MEV Capital vault)
Euler: While some markets are experiencing very high utilization rates due to the ongoing liquidity crunch, we have observed no bad debt at this time.
Aave, Dolomite, Fluid: No direct impact observed
Overall, lending market sizes are decreasing as curators and impacted parties unwind positions. We urge users and depositors to carefully examine the composition of vaults at this time given higher than normal APRs are a result of liquidity constraints due to the unwinds.
Actions Taken and Next Steps
Since Steam Finance’s announcement late Monday evening (EST), Entropy has continued to monitor ongoing secondary effects in interconnected vaults and markets.
Due to their exposure to xUSD, the Silo Varlamore USDC and the Silo TID USDC vaults were removed from Silo’s epoch 5 supply USDC campaign. Additionally, Silo has also proactively removed these vaults from their frontend. Incentives remain on the Silo Labs’ Optima USDC Vault and their Ethereal Vault.
Compared to Silo, Morpho incentives are conducted at the market level, not the vault level. Due to realized bad debt in one case and out of an abundance of caution for the other, we requested that Merkl blacklisted the following two vaults on Morpho from receiving DRIP rewards:
Given the permissionless nature of Morpho and Arbitrum, we cannot control what strategies and markets various vault curators include in their product offerings. Since the MEV Capital and Hyperithm vaults are allocated to eligible asset markets, for example thBill/USDC, the Morpho frontend is still displaying that these vaults are receiving rewards. We have made a request to the Morpho team to add a disclaimer or remove the indication of ARB rewards from the UI.
Looking forward through the remainder of Season One, Entropy will work with OCL and the AF to consider any necessary changes to parameters or participants. We will continue to keep the DAO updated as the situation evolves.
Disclaimer
Participation in the DeFi Renaissance Incentive Program (“DRIP”) involves risks. Leveraged strategies such as looping can result in liquidation or total loss of funds. ARB rewards do not compensate for potential losses. You should carefully assess your own risk tolerance before participating.
Nothing in this post or the DRIP program constitutes financial, legal, or investment advice. All participants are solely responsible for their own decisions and for complying with all applicable laws and regulations in their jurisdiction.
Rewards are not guaranteed. The amount and distribution of ARB depends on program parameters and user activity. Program terms, eligible assets, and budget allocations are subject to change at the discretion of the ArbitrumDAO.
Merkl, the Arbitrum Foundation, and the DRIP Committee are not responsible for smart contract risks, protocol vulnerabilities, or losses incurred on third-party platforms. DRIP is a community-governed initiative: Entropy Advisors manages program operations but does not control ArbitrumDAO governance or treasury decisions.
Merkl, the Arbitrum Foundation, and the DRIP Committee shall have no liability to you should they fail to make a payment of rewards to you, for any reason, including without limitation whether this be in relation to the amount you do or do not receive or a payment that does not go to your nominated wallet address. If you receive a payment that is not intended for you or if you receive more than you should have received, you shall, upon request, immediately return this to an address nominated by the Arbitrum Foundation.