How the Stream Finance debacle affected the rest of DeFi

A version of this article appeared in our The Decentralised newsletter on November 11. Sign up here.

A week after stablecoin issuer Stream Finance lost $93 million, we’re getting a clearer picture of its ripple effect on the broader DeFi ecosystem — and of a mounting legal battle.

One of the victims, a yield protocol called Trevee, published a post-mortem on November 7 explaining its own exposure to Stream.

Typically, these analyses explain a software flaw the team had overlooked, or a failure in operational security.

But Trevee’s writeup has something to say about DeFi writ large, to wit: the cascading risk embedded in a concept at the core of decentralised finance, that protocols are “money legos.”

Unlike traditional finance, where services are siloed, DeFi offers discrete, but interoperable tools that can be plugged into one another in order to create novel, lucrative financial products.

Here’s what happened to Trevee. The protocol helps users earn yield on their stablecoins and other crypto assets by depositing them in lending protocols such as Euler. It then issues yield-generating receipt tokens in exchange for those deposits.

Stream was one of Trevee’s borrowers. So, when it lost the $93 million — more on that in a moment — Trevee’s receipt tokens lost some of their backing.

Stream borrowed far and wide; all told, it had borrowed $283 million to mint its xUSD synthetic dollar, according to Trevee’s own estimate. Trevee’s own exposure was $14 million.

Trevee said it would shut down its rehypothecation feature and hire lawyers to pursue any amounts it may be owed as Stream goes through an expected bankruptcy process.

The Trevee team said it was also coordinating with other creditors to “ensure a unified front against Stream,” the post-mortem read.

Trevee wasn’t the only protocol affected. In addition to some relatively obscure protocols, DeFi stalwarts Compound, Euler, and Morpho had various levels of exposure to Stream, according to crypto risk manager Chaos Labs.

Stream said it has retained lawyers from white-shoe law firm Perkins Coie to investigate what went wrong, but has been radio silent otherwise.

Diogenes Casares, a co-founder of Klyra — the Buenos Aires-based company that built Stream — also hinted at turmoil among his colleagues.

“Our soul [sic] goal right now is to manage this situation best we can to make users as whole as possible,” he wrote on X. “This is why we transferred funds out of @0xlawlol’s control a few days ago while he was still cooperating.”

In another post, he said someone named “Caleb” had sole control over funds and strategies at Stream. It wasn’t immediately clear whether 0xlawlol and Caleb are the same person — Casares didn’t respond when I contacted him on Monday.

This gets at another persistent problem in the crypto space. While pseudonymity has its benefits, it makes it difficult to know who exactly you’re doing business with.

In theory, DeFi provides sufficient transparency to monitor risk and leverage in real time. But the money legos make it nigh impossible for an average user to find cracks in the foundation.

For instance, where’s Stream Finance’s $93 million?

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Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at aleks@dlnews.com.