Hidden Leverage and Third-Party Risks Trigger XUSD Collapse

The XUSD stablecoin, issued by DeFi protocol Stream Finance, collapsed to a record low of $0.30 on November 4, 2025, after the platform disclosed a $93 million loss tied to an external fund manager. The depegging, a 70% drop from its $1 benchmark, triggered panic across decentralized finance markets and underscored ongoing vulnerabilities in yield-focused protocols. Stream Finance immediately suspended all deposits and withdrawals, freezing $160 million in user funds while engaging legal firm Perkins Coie LLP to investigate the shortfall, according to a Yahoo Finance report.

The crisis emerged amid a broader wave of DeFi instability. Just 48 hours earlier, Balancer Protocol suffered a $100 million exploit, marking one of the largest breaches of 2025, reported by TradingView. Analysts noted that the timing of these events amplified market anxiety, with investors rapidly withdrawing funds from protocols perceived as poorly collateralized. "This is a temporary reprieve rather than lasting safety," warned a PeckShield report, which highlighted that while October 2025 saw an 85% drop in crypto hacks compared to September, the threat landscape remains dynamic, according to a BeinCrypto article.

Stream Finance's collapse was fueled by its high-leverage model. The platform, which deployed user deposits into recursive yield strategies, had previously advertised returns of up to 12% through leveraged farming across 50 liquidity pools. However, discrepancies between its reported total value locked (TVL)-$520 million-and independent tracking platforms like DeFiLlama, which showed only $160 million in verified user deposits, raised red flags about hidden leverage, according to a Coinotag report. Community sleuths speculated that the fund manager may have used customer assets to amplify risk exposure, leaving the protocol unable to meet redemption demands when prices fell, according to Yahoo Finance.

The fallout extended beyond Stream Finance. XUSD's collapse triggered cascading effects, with Euler and other lending protocols facing pressure from outdated oracles. Meanwhile, the incident reignited debates about the risks of third-party fund managers in DeFi. "This underscores the critical importance of understanding how protocols generate yield," said Minal Thurkal, head of DeFi Ecosystem Growth at CoinDCX, in a Coinotag article.

Stream Finance has pledged to recover liquid assets and provide periodic updates, but users face uncertainty. Over $3 billion in DeFi losses year-to-date-driven by incidents like the Bunni DEX $8.4 million hack-highlight the sector's fragility, according to Coinotag. While the platform emphasizes transparency through its legal probe, investors are urged to prioritize protocols with robust audits and clear governance.