Almost two weeks ago, the collapse of Stream Finance led to a domino-effect across the decentralized finance (DeFi) sector.
On-chain analysts had previously raised concerns over a web of risky looped-lending of one another’s assets, all while offering outsize returns on stablecoin deposits.
Some projects were able to wind down positions in an orderly fashion, and depositors came out relatively unscathed. However, elsewhere, worthless collateral left gaping holes, and repaying borrowed assets rapidly became less attractive.
Read more: Stream Finance meltdown: winners and losers in DeFi ‘risk curator’ reckoning
Taking stock
Over the past few days, curators have wrapped up the shortfall in remaining markets.
Depositors into the MEV Capital-managed USDC vaults on Morpho were left with haircuts of 3.5% (on Ethereum) and 12% on the equivalent Arbitrum vault.
The vaults were exposed to Elixir’s 99.8% depegged sdeUSD and Stream Finance’s 95% depegged xUSD.
In characteristically hostile fashion, Morpho-competitor Aave’s Marc Zeller took a victory lap.
Read more: Aave could leave Polygon over plan to use bridge funds for yield farming
Another curator with outstanding exposure is Re7 Labs, whose communications have been noticeably sparse since the crisis began. A November 8 post lists exposure of $14 million to deUSD, $13 million to Stable Labs’ 85% depegged USDX.
Since then, two updates have yet to disclose any concrete advances beyond the recovery of a $200,000 Morpho position on Worldchain.
Hyperithm, issuer of mHYPER, gave an update on its USDT Euler vault on Plasma, notifying users that 30% of the deposits were locked in a Re7 Labs vault.
Users will be able to withdraw the corresponding 70% and retain rights to the remaining 30% in case the Re7 Labs situation is resolved.
Caveat emptor
The permissionless lending platforms upon which many of these positions were built, Morpho and Euler, have consistently claimed to be merely infrastructure, with anyone free to set up markets with the parameters they deem suitable.
That said, Morpho seemingly responded to pressure from on-chain analyst Yields and More, pausing deposits to an affected vault. Euler has removed some exposed vaults from their user interface to discourage deposits. Pop-ups and banners on effective markets now appear on both Morpho and Euler.
However, statements from both teams make clear their position as offering laissez-faire infrastructure, hosting a suite of isolated vaults for differing risk appetites, and with operational parameters set by curators.
To that end, a push for transparency dashboards displaying on-chain data helps support a “buyer beware” narrative.
Lessons learned in DeFi?
Such a catastrophic collapse of the high-yielding stablecoin vault ecosystem appears to have snapped DeFi users out of the illusion that these products are safe bets.
Earning up to 20% on stablecoins requires a substantial amount of risk, visible or not.
On the “curator” side, Steakhouse Financial aims to rebuild trust with $2.5 million of “skin in the game.” A first-loss cushion is also apparently “in the pipeline”.
The episode has also renewed conversations of risk ratings for individual vaults.
Read more: Uniswap fee-switch: new era for DeFi or ‘a sad day for DAOs’?
Considering DeFi’s history, however, it seems almost inevitable that we’ll eventually get back to the same place eventually. The only thing that remains to be seen is whether the timescale will be months or years.
