Written by: Liu Ye Jinghong November 7, 2025 – The crypto market has yet to fully recover from the dramatic upheaval 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 significant outflow of funds 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 for the incident was Stream Finance , a once highly sought-after stablecoin protocol. However, as the dominoes began to fall, we realized 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 nature 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 real-world assets (such as cash, government bonds, and commercial paper). These stablecoins offer genuine "stability" and the confidence of guaranteed redemption, but at the cost of sacrificing the core principle of decentralization. 2. Algorithmic Stablecoins (broadly defined): This is a completely different world. Whether it's borrowed through over-collateralization or generated through more complex synthetic mechanisms, 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 event, belong to this category. The outbreak of this crisis is an extreme demonstration of the inherent vulnerability of Type II stablecoins. 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, this can easily trigger a fatal **death spiral**. The price of the underlying crypto asset (base asset) plummeted → the stablecoin lost market confidence due to insufficient collateral, its face value fell, leading to de-pegging → the previously high overcollateralization ratio of 200% or even 300% was rapidly eroded by the freefall in the collateral price → the protocol was forced to trigger a large-scale on-chain liquidation, selling the liquidated collateral to the market at market price → the selling further depressed the price of the collateral, triggering more liquidations... This is a vicious cycle, a domino-effect chain reaction of liquidation 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 losses of $93 million and froze deposits and withdrawals. This news instantly triggered market panic. Its stablecoin xUSD de-pegged within hours, with its price plummeting from $1 to $0.11, wiping out more than $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 go to 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 using xUSD and deUSD as collateral 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 has markets affected. If Compound's liquidation mechanism breaks down, or if it falls into crisis due to excessive bad debts, the consequences would be unimaginable. Fortunately, the Compound team acted swiftly, urgently shutting down some of the affected markets , demonstrating a resolute determination to prevent the further escalation 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 soberly aware that if Compound were to also be liquidated, its impact would far exceed that of the UST collapse in 2022, and it would directly shake the very foundation upon which the DeFi world exists. Reflections and Prospects: The Original Intentions and Future of Stablecoins In the aftermath of this crisis, we need to 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 failed 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 exclusively see them within nested "DeFi dolls," while they disappear entirely from situations where stablecoins are truly needed for payments, transactions, or value storage. These "stablecoins," which do not serve payment scenarios but are created for speculation and arbitrage, have always been a hidden minefield in the DeFi ecosystem. They have built a seemingly prosperous but actually fragile castle in the air, which will cause a catastrophic collapse once the market is shaken. This forces us to rethink what kind of stablecoin we really need. What we hope to see is for the stablecoin sector to return to its core value— achieving true 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 be dedicated to reducing the cost of cross-border payments, protecting personal assets from the erosion of hyperinflation, and becoming a powerful force empowering individuals. This billion-dollar tragedy is more than just a wake-up call about risk management. It's a powerful signal urging the entire industry to temporarily step away 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.Written by: Liu Ye Jinghong November 7, 2025 – The crypto market has yet to fully recover from the dramatic upheaval 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 significant outflow of funds 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 for the incident was Stream Finance , a once highly sought-after stablecoin protocol. However, as the dominoes began to fall, we realized 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 nature 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 real-world assets (such as cash, government bonds, and commercial paper). These stablecoins offer genuine "stability" and the confidence of guaranteed redemption, but at the cost of sacrificing the core principle of decentralization. 2. Algorithmic Stablecoins (broadly defined): This is a completely different world. Whether it's borrowed through over-collateralization or generated through more complex synthetic mechanisms, 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 event, belong to this category. The outbreak of this crisis is an extreme demonstration of the inherent vulnerability of Type II stablecoins. 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, this can easily trigger a fatal **death spiral**. The price of the underlying crypto asset (base asset) plummeted → the stablecoin lost market confidence due to insufficient collateral, its face value fell, leading to de-pegging → the previously high overcollateralization ratio of 200% or even 300% was rapidly eroded by the freefall in the collateral price → the protocol was forced to trigger a large-scale on-chain liquidation, selling the liquidated collateral to the market at market price → the selling further depressed the price of the collateral, triggering more liquidations... This is a vicious cycle, a domino-effect chain reaction of liquidation 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 losses of $93 million and froze deposits and withdrawals. This news instantly triggered market panic. Its stablecoin xUSD de-pegged within hours, with its price plummeting from $1 to $0.11, wiping out more than $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 go to 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 using xUSD and deUSD as collateral 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 has markets affected. If Compound's liquidation mechanism breaks down, or if it falls into crisis due to excessive bad debts, the consequences would be unimaginable. Fortunately, the Compound team acted swiftly, urgently shutting down some of the affected markets , demonstrating a resolute determination to prevent the further escalation 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 soberly aware that if Compound were to also be liquidated, its impact would far exceed that of the UST collapse in 2022, and it would directly shake the very foundation upon which the DeFi world exists. Reflections and Prospects: The Original Intentions and Future of Stablecoins In the aftermath of this crisis, we need to 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 failed 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 exclusively see them within nested "DeFi dolls," while they disappear entirely from situations where stablecoins are truly needed for payments, transactions, or value storage. These "stablecoins," which do not serve payment scenarios but are created for speculation and arbitrage, have always been a hidden minefield in the DeFi ecosystem. They have built a seemingly prosperous but actually fragile castle in the air, which will cause a catastrophic collapse once the market is shaken. This forces us to rethink what kind of stablecoin we really need. What we hope to see is for the stablecoin sector to return to its core value— achieving true 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 be dedicated to reducing the cost of cross-border payments, protecting personal assets from the erosion of hyperinflation, and becoming a powerful force empowering individuals. This billion-dollar tragedy is more than just a wake-up call about risk management. It's a powerful signal urging the entire industry to temporarily step away 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.