DeFi Vault Collapse: Lessons Learned?

The collapse of Stream Finance nearly two weeks ago triggered a cascading effect across the decentralized finance (DeFi) sector, exposing a complex web of risky lending practices and outsized stablecoin yields. Early concerns centered on looped lending and the potential for asset devaluation. While some projects managed orderly wind-downs, others faced significant collateral losses and repayment difficulties.

Curators have now finalized shortfalls in remaining markets. Depositors in MEV Capital-managed USDC vaults on Morpho experienced haircuts of 3.5% (Ethereum) and 12% (Arbitrum), stemming from exposure to depegged assets like Elixir’s sdeUSD (99.8% depegged) and Stream Finance’s xUSD (95% depegged). Aave’s Marc Zeller publicly highlighted the situation.

Re7 Labs, another curator with outstanding exposure, has been relatively quiet since the crisis began. A November 8 post revealed $14 million exposure to deUSD and $13 million to USDX, which depegged by 85%. Subsequent updates have yielded limited progress beyond recovering a small Morpho position.

Hyperithm, the issuer of mHYPER, disclosed that 30% of USDT deposits in its Euler vault on Plasma were locked in a Re7 Labs vault, allowing users to withdraw the remaining 70% while retaining rights to the remaining 30% if the Re7 Labs situation resolves.

Morpho and Euler, the lending platforms involved, maintain they are merely infrastructure, enabling users to create markets. While Morpho paused deposits to an affected vault following pressure from analysts, Euler removed some exposed vaults from its interface. Both emphasize the decentralized nature of their platforms.

The crisis has seemingly shaken DeFi users’ perception of risk, highlighting that high stablecoin yields require substantial risk. Steakhouse Financial aims to rebuild trust with a $2.5 million commitment and a potential first-loss cushion.

Discussions around risk ratings for individual vaults are ongoing. Despite this episode, it appears likely that DeFi will eventually return to similar practices, albeit with an unknown timeframe.

Source: protos.com

Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility.