On-chain analysts have spent the past few days scrutinizing a web of decentralized finance (DeFi) yield farming projects which collectively claim $950 million worth of total value locked (TVL).
Criticisms levelled at the projects include that they recursively lent funds between one another’s assets to inflate TVL, and the lack of transparency over the positions held.
Some have also raised doubts over the ability to unwind positions safely in order to secure the backing of their yield-bearing stablecoins, especially in the event of a liquidity crunch like that of October 10, 2025.
DeFi daisy chain
Projects such as YieldFi and Stream Finance aim to generate yield by using deposits to run delta-neutral strategies, similar to $10 billion “synthetic dollar” protocol Ethena.
They bill themselves as “asset management for the on-chain economy” and “the SuperApp DeFi Deserves,” respectively.
DeFi commentator Togbe kicked off the discussion with an X post on Sunday, casting doubt upon the stability of positions backing yield-bearing tokens.
It draws attention to the aforementioned recursive lending between YieldFi’s yUSD, Stream Finance’s xUSD, and other similarly designed tokens.
Users can mint yUSD (TVL $101 million) against other, non-yield-bearing, stablecoins and deposit into a vault as vyUSD for 11.5% APY.
Togbe’s post describes how vyUSD is leveraged up against itself and other yield-bearing assets on lending platforms Euler and Morpho.
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A similar pattern is followed by Stream Finance and its xUSD vault, which “takes advantage of market neutral strategies” to earn 18% yield on $420 million of USDC deposits.
Both strategies also rely heavily on mHYPER, another “market-neutral, stablecoin-dominated yield strategy” offering 8% return, issued by Midas and managed by Hyperithm.
At the time of Togbe’s post, YieldFi and Stream positions allegedly made up 30% of mHYPER’s $263 million TVL.
Another pseudonymous X user, going by “Schlagonia,” expanded on the concerns. They examined xUSD’s backing and its relationships, tracing similar connections between xUSD and Elixir’s $166 million deUSD, also a “yield-bearing synthetic dollar” offering 8%.
Togbe’s post sums up the situation as a “daisy chain of circular lending… propping up [the] yield vault market” in an “I scratch your back, you scratch mine system of yield sharing.”
Opaque it ‘til you make it
The availability of information on backing assets varies wildly between projects.
While YieldFi has a transparency dashboard with links to wallets, unpicking each position is a complex and lengthy manual task — the exact problem the project claims to solve.
Midas’ breakdown of mHYPER backing is arranged similarly to that of YieldFi, while Stream Finance says that transparency is “coming soon.” It also invites users to decipher its strategies via a bundle of three addresses on portfolio tracker Debank.
The main address (holding 97% of the bundle’s value) has a net value of $169 million spread across dozens of chains and DeFi protocols. Many positions are fully leveraged with dicey health factors of 1.01 to 1.05.
Stream claims to be “currently integrating” proof of reserves, urging those who offer such services to get in touch.
Mixed responses
YieldFi responded to the criticisms, addressing concerns around backing quality and promising an audit and proof of reserves from a third-party.
However, Togbe notes that the question of “why [the] majority of TVL is used to lend to vyUSD inflating the total supply” is left unanswered.
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Stream Finance’s 0xlaw — whose bio reads “good at losing money” — responded to the criticisms, highlighting a $10 million insurance fund.
They add that proof of reserves are “in the works” but stress that “publicly displaying a lot of our positions would lead to diminishing edge.”
This statement appears to be at odds with directing users to the aforementioned Debank bundle.
However, given the concern around the looped leverage of xUSD, they intend to “wind these positions down and cap them at a size base[d] off insurance fund size.”
Stream founder Soletty also weighed in, stressing that, despite the name, xUSD is not a stablecoin.
Instead it exists to give regular users exposure to the type of “high alpha hedge funds” that operate strategies, “from lending arbs, to incentive farming, to dynamically hedged HFT, to market making.”
Hyperithm also intends to reduce mHYPER supply to Euler and Morpho markets, used to loop yUSD and xUSD leverage.
In removing exposure to both assets, it claims “all [mHYPER’s] recursive lending components… have been fully removed.”
Wound up too tight?
As observers have pointed out, the web of looped leverage may be risky but, providing positions were unwound in an orderly fashion, initial deposits are accounted for.
However, Togbe continues to stress that the issue isn’t the risk itself, rather that these projects appear to be replicating identical, self-referential positions.
Stablecoin researcher Serenity argues that “recursive lending is not technically wrong,” but agrees that transparency is a “major concern.” It adds that it’s not difficult to “disclose all relevant investments on a daily basis,” especially when “fund managers have absolute liberty in investments.”
Infinifi’s Rob Montgomery also points to how the inflated TVL creates a false sense of trust that more depositor-dollars are willing to use the vaults.
He suggests using two separate metrics: “notional TVL” and “user deposits.”
Bullet (hopefully) dodged
Even if the accounting adds up in theory, some are still skeptical that the projects would be able to unwind positions in time to avert losses, especially during periods of intense volatility.
While specific tranches of funds available to withdraw within certain timeframes are displayed on project websites, in the wake of October 10’s sudden liquidity crunch, some find it hard to believe that none of the projects experienced a significant blow-up.
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Ethena’s TVL has dropped by a third since that event. Conversely, of the projects mentioned, only YieldFi experienced a significant drop.
DeFi caters to all levels of risk tolerance; “degenerate” experiments such as these are to be expected. Some even believe they should be encouraged to “make DeFi yield Ponzis great again.”
Meanwhile, the vaults are often marketed as delta-neutral, set-and-forget strategies with the “institutional rigor of firms like BlackRock” for users who may not be aware of what’s under the hood.
As opposed to other DeFi non-custodial yield optimization vaults, these projects’ teams fully control funds, for “flexibility.”
As the old DeFi adage goes, if you don’t know where the yield comes from… you are the yield.
