This isn't an isolated issue but a confluence of exploits, protocol failures, and broader market "risk-off" sentiment that's drained liquidity from lending markets and stablecoin pools. Total Value Locked (TVL) in DeFi has dipped below $200B for the first time since summer, with lending protocols, the backbone of DeFi, bearing the brunt. The market drop of -7% and -12% for BTC and ETH respectively on the weekly, has exacerbated the effect.
Several high-profile incidents in early November have acted as catalysts:
Balancer Exploit: A $128M hack on the Balancer DEX, stemming from a precision flaw in smart contract math, has eroded the usual trust of blue-chip DeFi protocols. Their exploit over their V2 version, live since 2023 and with over 10 audits from top firms in the space has been a hard pill to swallow. This has ripple effects across liquidity pools particularly for ETH LSTs, which were most of the assets obtained by the hacker. Balancer's TVL dropping 60% overnight and threatening solvency in dependent smaller protocols. This exploit has affected other protocols that were forking Balancer V2 technology, such as Beraswap and Beets, causing prompt reaction by Berachain that halted the network and Sonic that froze hacker addresses.
Cumulative percentage change of Dexes TVL (Source: Defillama)
Stream Finance Collapse: and its yield-bearing stablecoin xUSD faced a catastrophic meltdown on November 4, after disclosing a $93 million loss of user funds managed by an external fund manager, leading to the suspension of all withdrawals and deposits. The incident triggered a severe depegging of its USD-pegged stablecoin, xUSD, which plummeted over 80% to as low as $0.17, sparking widespread panic, investor outrage, and fears of contagion in the DeFi ecosystem, particularly in lending protocols where xUSD was being widely used by several curators.
Source: Geckoterminal
Moonwell Oracle Exploit: On November 4, a Chainlink oracle glitch caused faulty pricing for wrstETH, enabling an attacker (likely an MEV bot) to exploit flash loans and drain over $1M from Moonwell's lending markets on Base and Optimism. This incident highlights ongoing oracle risks with battle-tested infrastructure such as Chainlink, which lending protocols rely heavily on.
Source: Anthias x Moonwell
Elixir deUSD Liquidity Squeeze: Concerns over the Elixir protocol lending to Stream Finance prompted risk manager Gauntlet to pause USDC, USDS, and USDT markets on Compound's "Comets" (Ethereum-based money markets). This created a crunch in deUSD and sdeUSD tokens, spiking borrow rates above 20% APY in affected lending and halting new deposits. The impact has been severe in the Morpho Vaults where the coin was listed as collateral:
Source: Morpho dApp
Broader Leverage Wipeouts: Earlier perps liquidations in October ($30B across exchanges) drained orderbook liquidity, which has now spilled into spot DeFi lending due to the sharp market drop in prices. Aave alone saw nearly $100M in liquidations yesterday, close to the October 10 Black Friday, which peaked at $125M:
Source: Sentora x Aave Risk Radar
The confluence of all these events has triggered a significant systemic contagion event, that although very localized in certain protocols, is causing panic-driven withdrawals across major DeFi protocols. This effect was compounded for protocols with direct financial exposure to the Stream Finance insolvency. Stream's synthetic xUSD token, which became worthless after the protocol halted redemptions, was used as collateral across numerous lending markets. Consequently, Euler, one of the protocols identified as having significant xUSD exposure, experienced one of the most severe TVL drops, contracting by nearly 30%.
Cumulative percentage change of Lending Protocols TVL (Source: Defillama)
Current fears of broader contamination at larger venues such as Euler appear overstated: the known exposure is highly ring-fenced within specific curators on predominantly Plasma, limiting the impact to those isolated domains rather than broader markets. That containment reduces the probability of a generalized solvency event across its protocol.
This ecosystem-wide liquidity evaporation has had immediate, practical consequences for users:
Increased Slippage Costs: With liquidity pools on decentralized exchanges (DEXs) diminished, the price impact for swaps has increased considerably specially for LST tokens. For instance, prior to the crisis, large-volume swaps (e.g., >$70M) between wstETH and wETH could be executed with minimal slippage (yellow). Post-crisis, high slippage (orange/purple) is incurred at much smaller trade sizes, impairing the efficiency of on-chain trading, which impacts borrowers capacity to repay open loans:
Slippage over time for wstETH/wETH (Source: Odos)
Lower liquidity on DEXes exacerbates potential depegs, that while not severe for LSTs, has been causing some volatility, as can be seen in the chart below for wstETH/wETH. The ratio, which had been stable, broke down sharply on Nov 4-5, falling below the 72h standard deviation band, indicating a slight de-peg as users sold the LST for the underlying asset.
WSTETH Price deviation. Source: Sentora
Withdrawal Freezes: The most critical risk materialized in lending protocols. As users rushed to withdraw "safe" assets, utilization rates on some platforms spiked. On Euler, the USDT vault managed by TelosC in the plasma chain reportedly reached 100% utilization. This functionally freezes withdrawals for any remaining lenders, demonstrating how bad debt from worthless collateral (xUSD) can trap the capital of users in unrelated assets. This was not only a problem for xUSD related markets. Morpho USDC markets also suffered from lack of liquidity in the last couple of days, showing a spike in borrowing rates.
Symbol | Total Market Size | Total Liquidity | Borrow Rate |
srUSD/USDC 91.5% | $191,460,000.00 | $0.00 | 32.65% |
PT-cUSDO-20NOV2025/USDC 91.5% | $58,260,000.00 | $0.00 | 29.3% |
siUSD/USDC 91.5% | $25,230,000.00 | $0.00 | 30.27% |
reUSD/USDC 91.5% | $5,260,000.00 | $0.00 | 50.94% |
mF-ONE/USDC 91.5% | $49,290,000.00 | $0.00 | 53.03% |
mHYPER/USDC 86% | $92,410,000.00 | $0.00 | 64.63% |
OETH/USDC 86% | $3,250,000.00 | $0.00 | 1.79% |
PT-mHYPER-20NOV2025/USDC 86% | $18,820,000.00 | $0.00 | 63.24% |
PT-AIDaUSDC-30OCT2025/USDC 86% | $8,930,000.00 | $0.00 | 69.18% |
sdeUSD/USDC 91.5% | $8,660,000.00 | $0.00 | 64.17% |
upUSDC/USDC 91.5% | $8,420,000.00 | $0.00 | 53.23% |
liUSD-1w/USDC 86% | $6,060,000.00 | $616.57 | 4.102% |
AA_FalconXUSDC/USDC 77% | $9,850,000.00 | $1,588.24 | 34.02% |
RLP/USDC 86% | $35,590,000.00 | $11,980.00 | 32.63% |
PT-srUSDe-15JAN2026/USDC 91.5% | $28,180,000.00 | $11,980.00 | 27.64% |
ETH+/USDC 86% | $17,780,000.00 | $12,000.00 | 37.23% |
PT-cUSD-29JAN2026/USDC 91.5% | $24,210,000.00 | $21,200.00 | 40.7% |
stcUSD/USD 91.5% | $39,130,000.00 | $112,220.00 | 33.25% |
LBTC/WBTC 94.5% | $29,880,000.00 | $243,240.00 | 0.39% |
syrupUSDC/USDC 91.5% | $25,090,000.00 | $312,830.00 | 27.1% |
wbravUSDC/USDC 86% | $8,580,000.00 | $843,660.00 | 11.66% |
PT-reUSD-18DEC2025/USDC 91.5% | $8,830,000.00 | $865,970.00 | 44.5% |
yUSD/USDC 91.5% | $38,010,000.00 | $2,730,000.00 | 36.75% |
Available liquidity in different Morpho Vaults without direct exposure to xUSD, as of Nov 4. Most markets have normalized since then.
Market Outlook and Risk Management
While the situation remains fluid, market data suggests a tentative recovery in protocols that were not directly exposed to the Stream Finance bad debt. Liquidity and thus borrow rates on markets not directly exposed to xUSD (or deUSD) are coming back to normality slowly. Monitoring large, potentially liquidatable loans is key, as open collateral sales on DEXs could depress the collateral’s price.
This event underscores the profound understanding of contagion risks in an interconnected Defi ecosystem. The reliance on complex, opaque assets like xUSD as collateral creates financial "fault lines." A technical shock in one protocol can trigger a panic that exposes an unrelated financial failure, leading to a system-wide liquidity freeze that impairs swaps and blocks withdrawals, and forces liquidations due to high borrowing rates. Continued monitoring of on-chain liquidity levels and collateral-specific exposures is warranted as the market absorbs these losses.
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