xUSD Depeg Explained: What Happened and What It Means for the USDe Family

Depeg Behavior

xUSD was designed to maintain a $1 peg. However, following public disclosures, its price rapidly declined from approximately $1 to around $0.18, representing a loss of over 80%. Concurrently, lending pools that accepted xUSD or its derivative sUSDX as collateral experienced significant asset drainage, with substantial amounts of USDT, USDC, and USD1 being borrowed.

Project Response

Stream Finance issued a statement attributing the substantial losses to a third-party external fund manager handling the assets. The project engaged a law firm to investigate and subsequently paused all incoming and outgoing transactions. While the company stated its intention to "proactively liquidate remaining liquid assets," it initially failed to provide sufficient transparency or a comprehensive breakdown of the losses incurred.

Preliminary Causes

Analysis of on-chain data and third-party research has pointed to several contributing factors:

• •
  A significant discrepancy between the stated Total Value Locked (TVL) and the traceable on-chain assets.
• •
  A recursive leverage or rehypothecation strategy, where collateral was repeatedly borrowed and re-collateralized in loops to amplify risk.
• •
  Under extreme market conditions, Automated Deleveraging (ADL) and liquidation triggers were activated, leading to a sharp decline in collateral values and the collapse of the structure.
• •
  Concerns were raised regarding the team's or affiliated addresses potentially moving funds to exchanges before the wider market became aware, exacerbated by a general lack of transparency.

Misconceptions About Delta-Neutral Strategies

"Delta neutral" theoretically implies that the long collateral and short hedge offset each other, thereby reducing directional risk. In practice, Stream Finance structured this as a stablecoin business but operated it with multi-layered leverage and off-chain strategies. When market volatility increases, liquidity diminishes, and an external manager incurs losses, the strategy itself can become a significant liability.

Recursive Leverage & Rehypothecation Risks

Rehypothecation involves the repeated reuse of pledged assets across various borrowing loops. If the value of the collateral declines or liquidations are delayed, the entire structure can become unstable. As highlighted by ChainCatcher, xUSD's collateral and borrowing scale had reached multiple turns of leverage. Furthermore, certain key addresses were observed borrowing substantial amounts of stablecoins within a short period and transferring them to centralized exchanges (CEXs), intensifying the liquidity and confidence shock.

Lack of Transparency Around Third-Party/Off-Chain Asset Management

Stream Finance reported a TVL of approximately $500 million, whereas the verifiable on-chain assets were closer to $150 million. A considerable number of critical transactions occurred off-chain, managed by external entities and involving assets that were difficult to verify, which significantly eroded user trust.

Liquidation Mechanics Failed, Confidence Collapsed

When some lending pools became unable to meet repayment obligations, collateral values plummeted, borrow rates surged (exceeding 800% in some pools), and loans were rapidly drained. This led to a breakdown in conventional liquidation processes. Within this multi-layer negative feedback loop, the xUSD ecosystem quickly descended into a full-blown confidence crisis.

Structural Similarities & Systemic Risk

The xUSD depeg brings to light a more fundamental issue: are these "innovative" stablecoin structures merely different forms of leverage loops? xUSD and USDe share a crucial characteristic: instead of being backed 1:1 by fiat reserves or fully transparent on-chain collateral, they depend on delta-neutral hedging, such as shorting in derivatives markets, to counteract price volatility and generate "risk-free yield."

This theoretical model is viable only under specific conditions:

• •
  Derivatives markets must possess ample liquidity, even during periods of stress.
• •
  Liquidation, collateral, and treasury operations must be fully transparent and responsive.

xUSD's failure was primarily due to its inability to rebalance hedges effectively amidst market turbulence. The "delta-neutral" setup transformed into delta amplification, meaning risk was not neutralized but rather accumulated. This is not an isolated incident but serves as a systemic warning for structured stablecoins. When stability relies on financial engineering rather than verifiable assets, the equilibrium between stability and trust becomes precarious.

Credibility & Transparency, Revisited

The collapse of xUSD has directly impacted the credibility of similar designs, placing the USDe family squarely under increased scrutiny. If USDe continues to rely on off-chain management, leverage, and collateral loops, it must address two critical questions:

First, can its assets be fully verified on-chain?

If funds are held by centralized custodians or hedges are executed off-chain, external users are unable to verify these positions. Without on-chain proofs, transparency diminishes, and trust cannot be built effectively.

Second, are its liquidation mechanics robust?

During market stress, can the system rapidly close its hedges? Are there instances of hedging delays or liquidity vacuums? xUSD encountered both of these issues, which proved to be critical failures.

It is noteworthy that while USDe emphasizes "decentralized hedging and on-chain verification," its current hedging strategies still depend on centralized derivatives venues. If a centralized exchange experiences failure, its APIs break, or liquidations are delayed, the entire mechanism could be jeopardized. In essence, the innovation has not eliminated trust intermediaries; it has merely redefined them.

Lending Protocol Exposure Test

A further consequence is a sector-wide re-evaluation of risk within DeFi lending. In this recent episode, many lenders, particularly those accepting sUSDX/xUSD collateral, lacked real-time liquidation capabilities and consequently absorbed losses. When a "stablecoin" de-pegs, its collateral value collapses, triggering cascading liquidations that can potentially devastate a protocol.

As USDe expands its presence across money markets, it must confront this challenge. In ecosystems such as EigenLayer and Pendle, structured stablecoins are often integrated into yield-enhanced wrappers, offering users the opportunity to "hold a stablecoin and earn extra yield." While this attracts funds during bull markets, when the market sentiment shifts, negative feedback loops can be significantly amplified.

Put simply, "stable" in this context does not equate to zero risk; it signifies risk that is deferred and concentrated.

Therefore, USDe and similar projects must implement more stringent risk and collateral controls, including:

• •
  Dynamic collateral ratios.
• •
  Real-time monitoring of hedges and leverage.
• •
  Periodic on-chain and off-chain attestations of assets and positions.
• •
  Callable liquidation APIs and risk alerts for integrated lending markets.

These measures will be crucial for their survival under increased regulatory oversight and in the face of skeptical markets.

Regulatory Evolution & Industry Logic

The collapse of xUSD prompts regulators to reconsider the definition of stablecoins. Traditional stablecoins like USDT and USDC are backed by fiat reserves and are auditable under existing regulatory frameworks. Structured stablecoins, conversely, rely on derivatives hedging, meaning their stability is contingent on execution and prevailing market conditions. This makes their classification complex: are they stablecoins, structured notes, or covert funds? (It's worth recalling that Austin Campbell of Columbia Business School argued in 2023 that Ethena's USDe is not a stablecoin but rather a share in Ethena's structured product.)

Meanwhile, recent statements from authorities in the U.S. and Hong Kong indicate an intensified focus on "non-traditional stablecoins," with particular attention paid to:

• •
  The transparency and verifiability of backing assets.
• •
  The sustainability of hedging strategies.
• •
  The risks associated with leverage amplification and cross-collateralization.
• •
  The potential for misleading users into treating high-risk instruments as "stablecoins."

This suggests that models like USDe need to proactively align with compliance requirements. Continuing with semi-opaque approaches risks delisting from exchanges and a loss of user trust as regulations become more stringent.

From an industry perspective, xUSD's failure is not an isolated event but a critical stress test for the entire structured-stablecoin sector. It necessitates a redefinition of "stable" – not as unchanging yield, but as controllable, transparent, and predictable risk.