Elixir’s deUSD drops 98% – What’s happening?

Market analysts believe the deUSD depeg was caused by Elixir protocol’s exposure to Stream Finance, a DeFi yield aggregator whose external fund manager lost almost $100 million in user funds earlier this week.

Elixir’s dollar-pegged stablecoin lost 98% of its value and tanked to a low of $0.03 early Friday morning, according to blockchain security firm PeckShield. 

According to on-chain analysis by Nansen AI, Elixir had allocated roughly 65% of deUSD’s collateral to Stream Finance, which is around two-thirds of the stablecoin’s total backing. The loan to Stream DeFi left Elixir heavily dependent on the asset manager to maintain its dollar peg.

deUSD drop was caused by Stream Finance exploit

As reported by Cryptopolitan on Monday, Stream Finance admitted that a fund manager overseeing its investments lost approximately $93 million in user assets. The platform has since suspended all withdrawals and deposits while hiring attorneys from Perkins Coie LLP to investigate the loss. 

“Until we are able to fully assess the scope and causes of the loss, all withdrawals and deposits will be temporarily suspended,” Stream said in its official statement on X last Tuesday.

The decision left Elixir unable to access the majority of its backing reserves, although the protocol claimed it retained redemption rights at $1 per token. Stream reportedly informed the company that no payouts could be processed until attorneys determined creditor priority, according to a report by DeFi research collective Yields and More (YAM).

Technical flaws on Balancer prove costly to Stream Finance

According to security auditing firm Decurity, there was a vulnerability within DeFi protocol Balancer, which is integrated into Stream’s liquidity strategy. PeckShield and Decurity confirmed a bug in Balancer’s internal swap logic, within its batchSwap function, allowed attackers to use a rounding-down flaw and drain funds.

A faulty access control mechanism in Balancer’s manageUserBalance function compounded by a logic flaw in the validateUserBalanceOp process failed to verify message senders properly. This allowed unauthorized withdrawals through the UserBalanceOpKind.WITHDRAW_INTERNAL operation, giving attackers a direct route to siphon assets from Balancer’s vaults.

The breach caused Staked Stream USD (xUSD), another Stream-linked asset, to depeg and plunge to $0.50 and later to $0.14 within a day, per CoinGecko’s records.

Yields and More’s analysis identified nearly $285 million in direct debt exposure on lending protocols Euler, Morpho, Silo, and Gearbox. Creditors most affected include TelosC, Elixir, MEV Capital, and Varlamore, which all maintained significant collateral positions intertwined with Stream’s operations.

Stream, which held nearly 90% of the loan positions tied to deUSD, could no longer repay Elixir or unwind collateral positions. This left Elixir facing a severe redemption crisis as users rushed to exit the stablecoin.

Blockchain data on Wednesday revealed that Stream’s wallets began dumping large volumes of deUSD on decentralized exchanges. PeckShield traced one wallet, 0xcb4a7b790edb7fa3e2731efd7ed85275f92fc74a, as it sold huge chunks of deUSD against USDT in Curve Finance pools.

The sell-off caused deUSD’s price to collapse from $1 to $0.40 first, before it briefly regained its peg back to $0.99. Subsequent liquidations then pushed it further down to $0.03, wiping out nearly all market value. 

Per the sentiments of zKPass contributor and ETH smart contract developer Param.eth, the Curve-based dumping is a desperate attempt by Stream or associated wallets to liquidate holdings before insolvency proceedings begin. 

Elixir responds to the community, claims ‘hands are tied’

In response to the 90% depeg in its stablecoin deUSD, Elixir wrote a statement on X late Thursday, insisting it had processed redemptions for around 80% of deUSD holders before the price collapse. 

The company mentioned it could not do anything further to solve the devaluation because Stream holds approximately 90% of the remaining supply, valued at roughly $75 million.

“To protect the interest of these holders (and remove any risk of Stream liquidating deUSD before repaying their loan), a snapshot has been taken of all remaining deUSD and sdeUSD holder balances, and a claim page will go live later today,” the protocol stated.

Elixir said it is collaborating with other decentralized lenders like Euler, Morpho, and Compound, to pay out users and restore partial stability to its ecosystem.

“We still believe this will be honored 1 for 1,” Elixir wrote, confident that deUSD holders will eventually be compensated in full.