$42B drained from DeFi – Aave founder calls it a ‘hard but needed reset’

Key Takeaways

What triggered the DeFi “bank run”? 

Stream Finance’s xUSD lost $93M, causing mass depegging across yield-stablecoins and a $42B drop in DeFi TVL.

What’s next for the DeFi market? 

Projects like Aave urge safer protocol design and transparency as stablecoin confidence rebuilds after the liquidity shock.

Investors have adopted a risk-off mode across the DeFi sector following the contagion effect of depegging across several yield-bearing stablecoins.

The Total Value Locked (TVL) in DeFi declined to $131.58 billion at press time, from its recent high above $172.65 billion on the 7th of October, resulting in overall outflows of over $42 billion. That translates to a 24% decrease in locked value. 

Mapping the DeFi blow-up

On the 4th of November, Stream Finance, the protocol behind the yield-bearing stablecoin xUSD, announced that it had lost $93 million to an external fund manager.

This lost capital was users’ deposits backing the xUSD, and news quickly accelerated its depegging, exposing holders to losses. 

Unfortunately, other stablecoins that had direct and indirect exposure to xUSD, such as Elixir’s deUSD and Stable Labs’ USDX, also lost their peg as investors rushed to redeem their capital from the products. 

The products were also featured in curated vaults on top platforms, such as Morpho [MORPHO]. It made the panic spread swiftly, forcing players to rush for the exit, fearing a wider systemic risk. 

The end result?

Over $42 billion was pulled from DeFi, and the overall stablecoin market cap has contracted by $2.5 billion in the first week of November. Yield-based stablecoins’ TVL suffered the most. 

Ethena’s USDe takes the hit

Ethena’s Staked USDe was the hardest hit by the risk-off mode on yield-bearing stablecoins.

It saw about $400 million in outflows, which reduced its size from $5 billion to $4.6 billion. Overall, the USDe supply has dropped by 41% in the past month. 

Only products with relatively higher trust saw traction. Notably, the Sky Dollar (USDS), another yield-bearing stablecoin, saw its market size increase by nearly 8% to $5.7 billion, emerging as a key beneficiary of the DeFi rout. 

What’s next for the DeFi sector?

The blowup is parallel to a bank run, but for DeFi, making investors whole again can be tricky due to a lack of legal guardrails. This raises the question: Can DeFi truly self-regulate and mitigate such systemic risks? 

In fact, this DeFi risk is the very premise the banking lobby is using to oppose the crypto industry’s integration into the broader financial system. 

For his part, Stani Kulechov, Founder of top lending platform Aave [AAVE], warned that such systematic issues could “set the industry back significantly.” But he added, 

“We are close to building safe and secure DeFi, and we need to protect the users. Hope this is a good learning on how to build better DeFi.”