The first corpse on October 11th, the crash day: Stream's false neutral strategy exposed.

Author: Trading Strategy; Compiled by: Wu Shuo Blockchain

Stream xUSD was a "tokenized hedge fund" masquerading as a DeFi stablecoin, claiming to employ a delta-neutral strategy. Now, Stream is in trouble under dubious circumstances. Over the past five years, several projects have followed this strategy, attempting to launch their own tokens using revenue generated from delta-neutral investments. Some successful examples include: MakerDAO, Frax, Ohm, Aave, and Ethena.

Unlike many more authentic DeFi competitors, Stream lacks transparency regarding its strategy and positions. On portfolio trackers like DeBank, only $150 million of the claimed $500 million TVL is visible on-chain.

It turns out that Stream invested in off-chain trading strategies run by proprietary traders, some of whom were liquidated, resulting in the claimed $100 million loss. As CCN reported, Monday's $120 million Balancer DEX hack was unrelated to this. Rumors (which we cannot confirm because Stream has not disclosed) suggest that off-chain trading strategies involving "selling volatility" may be involved. In quantitative finance, "selling volatility" (also known as "short volatility" or "short vol") refers to a trading strategy that profits when market volatility decreases, remains stable, or the actual volatility is lower than the implied volatility priced in by the financial instrument. If the underlying asset price does not fluctuate significantly (i.e., low volatility), the option may expire worthless, and the seller can retain the premium as profit. However, this approach is very risky because a sudden surge in volatility can lead to huge losses—often described as "picking up pennies in front of a steamroller." We also experienced such a "volatility surge" during 1011. The fervor surrounding Donald Trump in 2025 fueled the long-term accumulation of systemic leverage risk in the cryptocurrency market. When Trump announced new tariffs, all markets panicked, and this panic spilled over into the cryptocurrency market. In the panic, preemptive selling was key, leading to a chain reaction of liquidations. Due to the long-term accumulation of leverage risk, systemic leverage reached a high level, and the perpetual futures market lacked sufficient depth to smoothly unwind and liquidate all leveraged positions. In this situation, the automatic deleveraging (ADL) system was activated, beginning to socialize losses among profitable market participants. This further distorted the already volatile market. The volatility resulting from this event is a once-in-a-decade event for the cryptocurrency market. While similar declines occurred in the cryptocurrency market in early 2016, we lack good data from that period, so most algorithmic traders developed strategies based on recent "volatility smoothing" data. Because such a surge has not been seen recently, even positions with leverage as low as ~2x were liquidated. Maxim Shilo, founding partner of a crypto quantitative trading firm, analyzes the impact of this event on algorithmic traders and the potential permanent changes to cryptocurrency trading after 1011 as follows: Strategies relying on stable, trending market conditions have proven extremely vulnerable to catastrophic blows. Managers without circuit breaker logic, tail risk hedging, or rapid deleveraging protocols face capital destruction unpredictable by traditional risk models. Every strategy must be rebuilt with 1011 as a new benchmark, rather than treating it as a historical anomaly. Asset allocators and managers who recognize this shift and quickly adjust their frameworks will be the winners in capturing institutional capital flows in the next phase of cryptocurrency evolution. [Note: Maxim Shilo's full article can be found in the references article "Deleveraging: Why 90% of Crypto Funds Are Down 50% Year-to-Date, and What Has Changed Forever"]

Now, the first "corpses" of the 1011 incident have surfaced, and Stream has been hit.

The definition of a delta-neutral fund is that it cannot lose money. If it loses money, it is not delta-neutral by definition. Stream promises to be delta-neutral, but privately invests in proprietary, non-transparent off-chain strategies.

Delta-neutral isn't always black and white, and hindsight makes it easier to judge. Many experts might argue that these strategies are too risky to be considered true delta-neutral. Because these strategies can backfire, and they certainly did. When Stream lost its principal in these bad trades, it became insolvent. DeFi is inherently risky, and the possibility of losing some funds always exists. While a 10% drop isn't devastating at an annualized return of 15% if you can still get 100% of your USD back, Stream also pushed its leverage to the extreme through a "recursive loop" lending strategy with another stablecoin, Elixir. Worse still, Elixir claims "priority" over Stream's principal in the event of bankruptcy, based on an off-chain protocol. This means Elixir may recover more funds, while other DeFi investors will receive less (or none). Due to the lack of transparency, recursive loops, and proprietary strategies, we don't actually know the full extent of the losses suffered by Stream users. Currently, the Stream xUSD stablecoin is priced at $0.15. Because this situation wasn't disclosed to these DeFi users, many are now extremely angry with Stream and Elixir: not only are they losing money, but the losses are being socialized to ensure that wealthy Americans with Wall Street backgrounds keep their profits. This incident has also affected lending protocols and their curators: "Everyone who thinks they're lending against collateralized positions on Euler is actually lending uncollateralized through a proxy" — Rob from infiniFi. Furthermore, due to Stream's lack of transparency or on-chain data regarding its positions and profits/losses, users began to suspect that Stream might fraudulently misappropriate user profits for its management team after these incidents. Stream xUSD stakers rely on Stream's self-reported "oracles" to generate profits, and third parties cannot verify the accuracy or fairness of the calculations. How to deal with this? Events like those involving Stream are avoidable in the young DeFi industry. The "high risk, high reward" rule always applies. But to apply this rule, one must first understand the risks: not all risks are equal, and some risks are unnecessary. Several reputable protocols for yield farming, lending, and stablecoins serve as tokenized hedge funds, with transparent risk, strategies, and positions. Aave founder Stani discusses the potential for DeFi curators and over-risking: The life or death of DeFi lending hinges on trust. One of the biggest mistakes is trying to compare DeFi lending to AMM pools, as they operate entirely differently. Lending can only function when people believe the market is robust, the collateral is reliable, the risk parameters are reasonable, and the entire system is stable. Once that trust breaks down, an on-chain bank run can occur. Therefore, the model where anyone can create lending pools without permission and promote them on the same platform has inherent weaknesses. Because most strategies have been commoditized, curators don't have many ways to stand out. They either minimize fees or take on increasingly risky ventures to attract funds from other pools. At some point, a major failure could destroy confidence in the entire industry and set it back. The next Terra Luna moment will come from a reckless curator on an open platform.