$42 Billion Withdrawn from DeFi: Aave Founder Calls for a Necessary Reset

The decentralized finance (DeFi) sector faced significant turmoil, with a staggering $42 billion withdrawn after the yield-bearing stablecoin xUSD lost $93 million. Aave's founder, Stani Kulechov, emphasized the need for safer protocol designs and transparency to restore investor confidence.

Key Takeaways

Stream Finance's xUSD suffered a loss of $93 million, leading to widespread depegging among stablecoins and a reduction of $42 billion in DeFi's Total Value Locked (TVL).
Platforms like Aave are advocating for enhanced security and transparency as the stablecoin market seeks to recover from the liquidity crisis.
Investors are exhibiting a risk-averse attitude in the DeFi landscape due to the cascading impacts of the stablecoin depegging event.
At the time of reporting, the TVL in DeFi had dropped to $131.58 billion, down from a previous peak of over $172.65 billion in early October, representing a 24% decrease.

DeFi stablecoin Source: DeFiLlama

DeFi

Understanding the DeFi Collapse

On November 4th, Stream Finance, the creator of the yield-bearing stablecoin xUSD, revealed the loss of $93 million to an external fund manager. This amount represented users' deposits that supported the xUSD. The revelation rapidly led to the depegging of the stablecoin, putting holders at risk of significant losses.

Unfortunately, other stablecoins both directly and indirectly linked to xUSD, including Elixir’s deUSD and Stable Labs’ USDX, also experienced depegging as investors scrambled to retrieve their funds. Many of these products had been featured in curated vaults on popular platforms like Morpho [MORPHO]. The resulting panic prompted a rush to exit, with concerns about broader systemic risks growing.

The aftermath was severe: DeFi experienced an outflow of over $42 billion, and the overall market cap of stablecoins shrank by $2.5 billion during the first week of November. Yield-based stablecoins bore the brunt of these losses.

DeFi stablecoin Source: X

Impact on Ethena’s USDe

Ethena’s Staked USDe was significantly affected by this shift towards a risk-off approach regarding yield-bearing stablecoins. The product experienced around $400 million in outflows, shrinking its size from $5 billion to $4.6 billion, with the overall supply of USDe declining by 41% over the past month.

DeFi stablecoin Source: Coingecko

Interestingly, only stablecoins with a higher degree of trust managed to retain traction. The Sky Dollar (USDS), for example, saw its market size increase by nearly 8% to $5.7 billion, emerging as a notable beneficiary amidst the challenges faced by other DeFi projects.

What Lies Ahead for DeFi?

This incident resembles a bank run, but restoring investor confidence in DeFi poses unique difficulties due to the absence of legal protections. It raises an important question: Can decentralized finance effectively self-regulate to prevent such systemic issues in the future?

This risk narrative is being leveraged by the banking sector as they resist the integration of cryptocurrencies into conventional financial systems. Stani Kulechov, the founder of the renowned lending platform Aave [AAVE], cautioned that these systemic issues could have serious repercussions for the industry. However, he maintained optimism, stating, “We are getting closer to creating safe and secure DeFi, and we must protect users. I hope this serves as a valuable lesson in developing better DeFi.”