DeFi's House of Cards Shaken as Synthetic Stablecoin Collapse Sparks Chain Reaction

Elixir, a decentralized finance (DeFi) liquidity protocol, has announced the discontinuation of its deUSD synthetic stablecoin following the collapse of Stream Finance, a major borrower that incurred a $93 million loss earlier this week, according to a TradingView report. The protocol has processed redemptions for 80% of deUSD holders, with the remaining balances set to be redeemable 1:1 for USDC through a claims portal once launched. Stream Finance, which borrowed $68 million in deUSD to back its xUSD stablecoin, suspended withdrawals on Nov. 4 after disclosing the massive loss, Cointelegraph reported.

The xUSD stablecoin, now trading below $0.20, has caused knock-on effects, including the depegging of Stable Labs' USDX token. Elixir highlighted that Stream holds roughly 90% of the deUSD supply (~$75 million), while Elixir's remaining collateral is largely tied up as a Morpho loan to Stream. To mitigate further risk, Elixir disabled deUSD's mint and redeem functions, stating it is collaborating with decentralized lenders such as Euler, Morpho, and Compound to liquidate its Stream positions and distribute repayments to holders, as The Block reported.

Launched in mid-2024, deUSD aimed to offer a "truly decentralized" non-custodial alternative to Ethena Labs' USDe synthetic dollar. It gained traction as collateral for DeFi platforms and was even adopted by Hamilton Lane's tokenized HLSCOPE fund. However, the crisis underscores the fragility of synthetic stablecoins reliant on cross-protocol lending. Elixir emphasized that deUSD remains fully backed and that redemptions will be honored 1:1, though users are warned to avoid purchasing the token as it loses value, according to a LookonChain post.

The collapse has drawn comparisons to the 2022 failures of Terra's UST and Iron Finance, though the scale remains confined to DeFi credit markets. Elixir's swift action to halt withdrawals and prioritize creditor protection aims to prevent forced liquidations during recovery efforts, as noted in a FinanceFeeds report. Meanwhile, the depegging of xUSD has exacerbated market jitters, with liquidity pools on decentralized exchanges experiencing steep outflows.

Elixir's redemption plan includes a snapshot of remaining deUSD and sdeUSD holder balances, ensuring equitable distribution. The claims portal, currently under development, will allow users to redeem their holdings directly for USDC. The team has not disclosed a timeline for the portal's launch but reiterated its commitment to full redemptions, Weex reported.

The incident highlights the systemic risks inherent in DeFi's interconnected lending ecosystems. As Elixir works to unwind its exposure to Stream, the broader market grapples with eroding confidence in uncollateralized synthetic stablecoins. For now, the focus remains on orderly redemptions and minimizing contagion in an increasingly volatile landscape, Gate reported.

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