Balancer Hack Cascading Effect: Why Did XUSD Break the Buck?
Original Article Author: Omer Goldberg, Chaos Labs
Original Article Translation: DeepTech TechFlow
Summary
Several hours after the DeFi space experienced widespread uncertainty due to a vulnerability attack on the multi-chain platform @Balancer, @berachain performed an emergency hard fork, and @SonicLabs froze the attacker's wallet.
Subsequently, the price of Stream Finance's xUSD stablecoin significantly deviated from its target range, exhibiting a clear de-pegging event.
Long-Standing Issues Resurface
The long-standing controversies surrounding leverage, oracle reliance, and Proof of Reserves (PoR) transparency once again took center stage.
This is precisely the case of a typical "reflexivity stress event" outlined in our "DeFi's Black Box/Treasury" article last Friday.

What Happened? / Background
The Balancer v2 vulnerability emerged across multiple chains, and for a considerable amount of time, it was unclear which pools were affected, which networks or integrated protocols were directly exposed to risk.

Capital Panic in an Information Vacuum
In the information vacuum, capital's response was as expected: depositors rushed to withdraw liquidity from anywhere they perceived to be potentially impacted directly or indirectly, including Stream Finance.

Transparency Dispute
Stream Finance currently does not maintain a comprehensive transparency dashboard or Proof of Reserve; however, it does provide a link to the Debank Bundle to display its on-chain positions.
However, following the vulnerability outbreak, these modest disclosures failed to definitively address the risk exposure issue: the price of xUSD (Stream's yield-bearing USD product) dropped from the target price of $1.26 to $1.15, currently rebounding to $1.20, while users reported withdrawal suspensions.

Risks and Controversies of Stream Finance
Stream is an on-chain capital allocation platform that utilizes user funds to implement high-yield, high-risk investment strategies.
Its portfolio construction involves significant leverage to make the system more resilient under pressure. However, the protocol has recently come under public scrutiny due to controversies surrounding a recursive minting mechanism.
While the current situation does not directly indicate a liquidity crisis, it unveils the market's high sensitivity. When negative news emerges and confidence is questioned, the shift from "probably fine" to "immediately redeem" often occurs swiftly.
xUSD is used as collateral distributed across curated markets on multiple chains, including Euler, Morpho, and Silo, spanning ecosystems like Plasma, Arbitrum, and Plume.
The protocol itself carries significant risk exposure in these markets, with the largest exposure being $84 million USDT borrowed against xUSD collateral on Plasma.

Collateralization Mechanism and Risk Buffering
When the market price of xUSD falls below its book value, relevant positions are not immediately liquidated. This is because many markets do not peg the collateral's value to the spot AMM price but rely on hardcoded or "base value" oracle feeds that track assets' reported backing rather than current secondary market prices.
During calm periods, this design can help mitigate tail risk liquidation due to short-term volatility, especially in stable products. This is also why DeFi protocols outperformed centralized platforms during the liquidation wave on October 10.
However, this design can also swiftly turn price discovery into trust discovery: selecting a base (or hardcoded) oracle requires thorough due diligence, including the authenticity, stability, and risk characteristics of the asset backing.
In short, this mechanism only applies when full Proof of Reserve is available and redemption can be completed in a reasonable time frame. Otherwise, the risk is that the lender or depositor may ultimately bear the consequences of default.

Stress Test on Arbitrum
Using Arbitrum as an example, the current market price of the MEV Capital Curated xUSD Morpho Market has fallen below the LLTV (Minimum Loan-to-Value). If the anchoring price of xUSD cannot recover, in a scenario where the utilization reaches 100% and the borrowing rate soars to 88%, the market may further deteriorate.
We are not against base layer oracles; on the contrary, they play a crucial role in preventing unfair liquidations caused by short-term fluctuations. Similarly, we are not against tokenization or even centralized yield-bearing assets. However, we advocate for basic transparency and the adoption of modern, systematic, and professional risk management when deploying currency markets around these assets.
Curated Markets can be an engine for responsible growth, but they should not devolve into a race to sacrifice security and rationality for the sake of chasing yields.
If what is built is a "domino-like" complex structure, then the collapse should not be surprising when the first gust of wind blows. As the industry professionalizes and some yield products become more structured (but potentially more opaque to end-users), risk stakeholders must raise the bar.
Although we hope to eventually resolve the issues for affected users properly, this incident should serve as a wake-up call for the entire industry.
You may also like

Aster Coin: A Deep Dive into Its Price, Potential, and Why It’s Catching Eyes in 2026
Have you ever stumbled upon a crypto project that seems poised for growth amid market volatility, only to…

Left Hand BTC, Right Hand AI Computing Power: The Gold and Oil of the Data Intelligence Era

Wyoming’s FRNT Stablecoin Launches — First State-Backed Stablecoin Hits Market
Key Takeaways Wyoming leads innovation in the U.S. by launching the first state-backed stablecoin, FRNT, representing a pivotal…

Key Market Insights for January 8th, how much did you miss out on?

Farewell to "Air" Investments: Use These 6 Key Metrics to Identify a Winning Project

The old altcoin script is outdated, take you to decipher the new market structure

Coin Ownership or Equity Ownership? The Real Question Is Being Asked Wrong

Ranger Fund Takes a New Approach to Public Offering: Can a Grassroots Team Earn Market Trust?

CoinDesk 20 Performance Update: Uniswap (UNI) Dips 1.5% as Index Experiences Downturn
Key Takeaways Uniswap (UNI) experienced a notable drop of 1.5% as the CoinDesk 20 Index saw a decline.…

Crypto Markets Today: Bitcoin Slides as Asia-Led Sell-Off Hits Altcoins
Key Takeaways: Bitcoin could not surpass the $94,500 mark and fell to roughly $91,530, contributing to a wider…

Start-of-the-Year Crypto Rally Stalls: What’s Next?
Key Takeaways The initial crypto market boost at the start of 2026 has lost momentum, primarily due to…

Karatage Welcomes Shane O’Callaghan as Senior Partner in Strategic Move
Key Takeaways Karatage, a London-based hedge fund, appoints Shane O’Callaghan as a senior partner to enhance its institutional…

JPMorgan Targets Canton Network for Next Phase of JPM Coin
Key Takeaways JPMorgan’s Kinexys unit is set to advance the use of JPM Coin by integrating it with…

2025 Crypto Bear Market: A Crucial Year for Institutional Repricing
Key Takeaways The 2025 crypto bear market witnessed significant corrections in the DeFi and smart contract sectors, setting…

Trend Research: 2026 Beyond Paradigm, WLFI Initiates Financial Ecosystem New Era

2026 Crypto New Year's Rally: Cautiously Bullish Market Sets Sail

Privacy Lane, a16z's Key Trends for 2026

When a Shitcoin Loses Consensus, Where Can You Still Find Alpha?
Aster Coin: A Deep Dive into Its Price, Potential, and Why It’s Catching Eyes in 2026
Have you ever stumbled upon a crypto project that seems poised for growth amid market volatility, only to…
Left Hand BTC, Right Hand AI Computing Power: The Gold and Oil of the Data Intelligence Era
Wyoming’s FRNT Stablecoin Launches — First State-Backed Stablecoin Hits Market
Key Takeaways Wyoming leads innovation in the U.S. by launching the first state-backed stablecoin, FRNT, representing a pivotal…