November 7, 2025 — The crypto market has yet to fully recover from the violent shock of October 11th, and a perfect storm triggered by stablecoins is sweeping across the entire DeFi world at an alarming pace. In the past week, we have witnessed the most severe capital outflow from yield-bearing stablecoins since the Terra/UST crash in 2022, totaling a staggering $1 billion. This is not merely an isolated protocol failure, but a chain reaction of liquidations revealing deep structural cracks in the modern DeFi ecosystem. The trigger was Stream Finance, a once highly sought-after stablecoin protocol. However, as the dominoes began to fall, we discovered that any risk could spread five or six layers down the intricate Lego castle of DeFi, ultimately triggering a systemic crisis of trust. Two Worlds of Stablecoins: Understanding the Roots of the Crisis To understand the essence of this crisis, we must first recognize the fundamental differences within the stablecoin sector. Currently, stablecoins can be broadly divided into two categories: 1. 100% Reserved Stablecoins: Represented by USDT and USDC, these rely on the compliant operation and robust financial auditing of centralized institutions. Their value is 100% backed by highly liquid assets in the real world (such as cash, government bonds, and commercial paper). These stablecoins provide true "stability" and the confidence of guaranteed redemption, but at the cost of sacrificing the core concept of decentralization. 2. Algorithmic Stablecoins (in a broad sense): This is another completely different world. Whether it's borrowed through over-collateralization or generated through a more complex synthesis mechanism, as long as its core collateral is cryptocurrency, its stability mechanism relies on algorithms and on-chain contracts. xUSD and deUSD, the protagonists of this incident, belong to this category. This crisis is an extreme demonstration of the inherent vulnerability of this second type of stablecoin. The Death Spiral: The Fate of Algorithmic Stablecoins The biggest Achilles' heel of algorithmic stablecoins lies in their dependence on the price of the cryptocurrency used as collateral. During market downturns, a fatal **death spiral** can easily be triggered: The price of the underlying crypto asset (base asset) plummets → Stablecoins lose market confidence due to insufficient collateral, their face value falls, leading to de-pegging → The previously high overcollateralization ratio of 200% or even 300% is rapidly eroded by the freefall in collateral prices → The protocol is forced to trigger large-scale on-chain liquidations, selling the liquidated collateral to the market at market price → This selling further depresses the price of the collateral, triggering more liquidations… This is a vicious cycle, a domino-effect chain of liquidations in DeFi. Once it happens, it will be a fatal blow to the entire ecosystem. From xUSD to Compound: A Systemic Collapse Barely Contained This time, Stream Finance pulled the trigger on the death spiral. On November 3, Stream announced that its off-chain fund managers had incurred a loss of $93 million and froze deposits and withdrawals. This news instantly triggered market panic. Its stablecoin, xUSD, de-pegged within hours, its price plummeting from $1 to $0.11, wiping out over $500 million in market value. Since xUSD was one of the core collaterals of Elixir Finance's stablecoin, deUSD, the collapse of xUSD directly caused the collateral value of deUSD to become zero, triggering a second round of de-pegging. Subsequently, the crisis spread to mainstream lending platforms such as Morpho and Euler. A large number of positions secured by xUSD and deUSD instantly became bad debts, the deposit pool was emptied, interest rates turned extremely negative, and depositors' funds were frozen. At this critical moment, the entire DeFi world held its breath, turning its attention to the industry's cornerstone—Compound. As one of the largest leading lending protocols, Compound also had affected markets. If Compound's liquidation mechanism had collapsed, or if it had fallen into crisis due to excessive bad debts, the consequences would have been unimaginable. Fortunately, the Compound team acted swiftly, urgently shutting down some of the affected markets, resolutely preventing the further expansion of the chain of liquidations. This decisive measure temporarily stabilized the situation, barely containing a systemic disaster that could have engulfed the entire DeFi ecosystem. We must be keenly aware that if Compound were to also be liquidated, its impact would far exceed that of the UST collapse in 2022, directly shaking the very foundation upon which the DeFi world exists. Reflection and Outlook: The Original Intention and Future of Stablecoins After this crisis, we must not only review the technical risks, but also examine a fundamental question: were the original intentions behind the creation of these on-chain algorithmic stablecoins flawed from the outset? Examining these collapsed protocols, we find that most of them did not serve real-world use cases. Their existence seems solely for complex arbitrage games within the DeFi world. You almost only see them within nested "DeFi nested dolls," while they disappear in situations where stablecoins are truly needed for payments, transactions, or value storage. These "stablecoins," designed for speculation and arbitrage rather than payment, have always been a hidden danger in the DeFi ecosystem. They construct a seemingly prosperous but actually fragile castle in the air, prone to catastrophic collapse at the slightest market fluctuation. This forces us to rethink what kind of stablecoins we truly need. What we hope to see is the stablecoin sector returning to its core value—achieving genuine financial inclusion. The stablecoin of the future should be a tool that allows a wider range of users globally, especially the billions excluded from the traditional financial system, to use it without boundaries or permission. It should aim to reduce the cost of cross-border payments, protect personal assets from the erosion of hyperinflation, and become a powerful force empowering individuals. This billion-dollar tragedy is more than just a wake-up call regarding risk management. More importantly, it sends a strong signal, urging the entire industry to temporarily step back from the frenzied "DeFi Lego" game and re-examine our goals. What we need is a financial future that is not only more technologically resilient but also, more importantly, returns to its original purpose: serving the broader well-being of humanity.
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