DeFi's Rehypothecation Gamble: $284M Crisis Exposes Systemic Fragility

DeFi analysts have traced $284 million in loans and stablecoin exposure to the collapse of Stream Finance, a synthetic asset protocol that disclosed a $93 million loss in early November. The interconnected nature of decentralized finance has amplified risks, with assets tied to Stream's xUSD, xBTC, and xETH tokens rehypothecated across platforms like Euler, Silo, and Morpho, creating a cascade of potential defaults and liquidity crunches. Independent researchers at YieldsAndMore estimate that Stream-related debts span at least seven blockchain networks and involve counterparties such as Elixir ($68 million), TelosC ($123.6 million), and MEV Capital ($25.4 million), underscoring the fragility of rehypothecation-driven capital efficiency in DeFi, according to The Block.

Stream Finance, which operates a protocol for minting synthetic assets backed by on-chain collateral, has suspended all deposits and withdrawals while an investigation led by Perkins Coie LLP unfolds, according to CoinDesk. The firm attributed the loss to an external fund manager overseeing its assets, though details remain unclear. The company has pledged to provide updates as the probe progresses but has not yet outlined a resolution for affected users or creditors. The fallout has left xUSD, a widely used stablecoin, in a precarious position, as it underpins lending markets across multiple chains, including Arbitrum and Plume.

The systemic risk stems from the rehypothecation of Stream's collateral, where assets are repeatedly lent across protocols to maximize yields. For example, Elixir's deUSD stablecoin lent $68 million in USDC to Stream, representing 65% of its total backing. Elixir claims it holds "full redemption rights at $1" for its position, but Stream's pause on repayments has left creditors in limbo. Similarly, Treeve's scUSD stablecoin is entangled in multi-layered lending loops through Mithras and Silo, further complicating the path to recovery, as The Block reported. YieldsAndMore warns that indirect exposures—such as derivative stablecoins and liquidity vaults—could elevate the total risk beyond the current $285 million estimate.

The Stream incident adds to a turbulent week for DeFi, following a $128 million exploit at Balancer and a $1 million oracle attack on Moonwell. Together, these events have erased over $222 million in value from decentralized protocols, exposing the vulnerabilities of interconnected collateral systems. The GENIUS Act, which recently enabled traditional banks to hold stablecoins, may offer a regulatory framework to mitigate such risks, but its implementation remains nascent. For now, the DeFi ecosystem grapples with the reality that overcollateralization and rehypothecation, while boosting yields, also amplify contagion in times of stress.