Ethereum News Today: DeFi's Systemic Risks Exposed as Gauntlet Proposes Emergency Market Pause

The DeFi research firm Gauntlet has proposed an emergency suspension of USDC, USDS, and USDT borrowing markets on Ethereum's Compound v3 protocol, citing a liquidity crisis in Elixir's deUSD and sdeUSD tokens. The move, announced on November 5, aims to prevent further losses as these tokens—listed as collateral in the affected markets—face severe devaluation. Gauntlet's proposal recommends halting withdrawals and new borrowing until governance approves risk parameter updates, though the measure has yet to be formally adopted.

The urgency stems from a reported $93 million asset loss by Stream Finance, a yield-focused DeFi platform that disclosed the breach after an external fund manager revealed the shortfall. Stream's stablecoin, xUSD, rapidly plummeted to as low as $0.24 on November 4. The collapse was attributed to Elixir's deUSD and sdeUSD, which lost over 70% of their value, triggering a chain reaction across interconnected protocols. Stream Finance has since suspended deposits and withdrawals while engaging law firm Perkins Coie to investigate the incident.

Gauntlet's proposal highlights the systemic risks posed by recursive DeFi strategies, where leveraged positions and opaque fund management amplify vulnerabilities. The firm noted that oracles for deUSD and sdeUSD remained artificially inflated, allowing users to borrow against collateral at rates far above market value—a critical flaw that contributed to the crisis. "Until governance approves updated risk parameters, pausing these markets is the only way to prevent further withdrawals that could destabilize the system," a Gauntlet representative stated, according to the Compound Community Forum.

The move has sparked debate within the DeFi community. While many support the pause as a necessary precaution, critics warn of prolonged distrust. "Every hour these markets remain paused erodes confidence in Compound's liquidity guarantees," one forum participant wrote. Others emphasized the need for stricter collateral vetting, particularly for major stablecoin markets.

The crisis underscores broader vulnerabilities in DeFi's rapid expansion. Just days prior, automated market maker Balancer suffered a $100 million exploit, compounding concerns about protocol security. Analysts like Omer Goldberg of Chaos Labs linked the two incidents, noting that the Balancer breach likely accelerated capital flight from perceived high-risk protocols.

For now, the Ethereum stablecoin markets remain in a precarious state. Gauntlet has urged swift governance action to adjust supply caps and resume operations, but no timeline has been set. In the interim, users face uncertainty as protocols like Yei Finance and Falcon Finance also grapple with market anomalies. Additional coverage, including a detailed post on the situation and its fallout, appeared in other outlets such as DeFi Planet.