Schlag@Schlagonia
172 days ago the Stream team messaged me to complain about a snarky tweet I had made about their vault code.
This was the last message I sent them.
Obviously they did not listen and we are in fact worse off because of it.
Contrary to what many seem to feel, none of what happened came out of nowhere. As with any good bubble/blow up it has been slowly brewing and was simply a matter of time till it burst.
It took one conversation with their and 5 minutes of scrolling their Debank to realize that this was going to end poorly.
And while Stream was the most egregious, they are far from the only ones out there with bodies to hide.
So while I have my 15 minutes of CT's attention here are a few long, but hopefully final, thoughts on our latest saga.
First on Stream in particular.
Even I was surprised at the size of their loses, and while we wait to see what the official reason for the hole is, I think its pretty obvious you don't delegate 9 figures of user capital to "external managers". And the only way you loose that amount of money is leverage trading shitters.
Seems clear these kids started directionally trading with user capital while lying about it. This isn't a phenomenon unique to DeFi, it's a tale as old as time. And ironically one of the primary original selling points of the benefits of DeFi, to not allow this.
Nonetheless, I still don't think the market has fully grasped the extent of the insolvency. At time of writing this xUSD is trading at about $0.25 or 20% of its PPS of 1.27 and deUSD is at $0.99 still. So lets do some math.
If we look at the current state of Stream's assets their total DeBank bundle claims $138m and liabilities of their dashboard says $160m of user deposits.
However, seams safe to write off all of the value in 0x15 at this point, given its almost all xUSD and deUSD levered positions that they have no ability to ever unwind. And assume their new msig 0x14b is all of the returnable funds which is currently $63m.
Then we come to the liabilities, which is where the recursive looping and unbacked minting kicks everything up. Since they have no viable path to repay their xUSD loans we can assume that all will eventually end in liquidation in some capacity. Which given the limited on chain liquidity likely leads to lenders taking possession of the xUSD posted as collateral, which fully breaks their recursive accounting and causes a 2X+ of the outstanding xUSD liabilities and creditors that will be looking for repayment and redemptions.
My best estimate from Debank is they have a total of close to 300m xUSD currently leveraged across their wallets. At current PPS of 1.27 this increases their outstanding liabilities by about $380m to $540m.
Which would then give an expected redemption value of 63/540 for close to a 90% loss or $0.14 per xUSD.
Of course this also means deUSD will take at minimum 20-30% bad debt, assuming their 1:1 agreement won't hold up given Stream doesn't have enough to pay Elixir back in full even if they did abide by it.
And anything lent or backed against xUSD or deUSD takes on their equivalent amount of bad debt.
Fun thought experiment for the reader is how do you price the 6.2m deUSD 0x14 currently holds given its redemption price is dependent on xUSD's.
Now, I have no idea when or if these liquidations will actually occur. Given all the oracles are hardcoded, lenders only recourse is to wait till the interest accrual liquidates them.
Places like Elixir's Morpho market on Plume this is likely to happen soon given Morpho's adaptive IR curve the borrow rate is already 190%.
On Euler, especially Plasma, it could take months given the hardcoded caps on the IR curves.
While I would expect the redemption process to take weeks to months, it is also possible they keep these positions alive long enough to just serve withdraws to circulating shares and therefore all lenders to xUSD will take a 100% loss in order to reduce the losses for current xUSD holders.
This exact reason is why, regardless of their shitcoin trading practices, what they were doing with collateralizing the self looped shares was extra levels of retardio even for this industry.
And as always is another friendly reminder that leverage is a fickle bitch and magnifies in both directions.
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While I will leave most of the pontificating about the long term effects to DeFi to the clearly ever so alert CT crowd, obviously we have some issues.
At Yearn we have been speaking about this for quite some time, but seams the rest of DeFi has now woken up.
While any new meta such as Curation or Vaults, will have people pile in and there are bound to be bad actors or those that cut corners.
This clearly goes far beyond that. Almost every major "risk manager" showed themselves to be baphoon's in some capacity far beyond just those that directly allocated to Stream assets. Due diligence is the primary slower of growth and therefore gets thrown out first.
Users see vaults labeled as Prime, Core, Horizon, High Yield, etc all with a Curator name that means nothing to them and just end up chasing yields inevitably pushing the industry up the risk curve.
We need standardization, we need proper transparency and due diligence, and we need to understand when you treat financial markets like a high growth SAAS tech play, things like this are bound to happen.
A risk managers job is to say NO. If you are not doing that, or just waiting till shit goes sideways to try and pull your funds faster than others. Your not a risk manager you're a clown.
Hopefully as the system absorbs nine figures of bad debt it makes those leading the charge think a bit harder before they list the next shiny new shitcoin.
Outside of improvements to curation my top personal hope is this makes all vault providers currently using the black box method of off chain pricing their shares to change course.
This is one of the most terrifying widespread adoptions of this cycle, in which multisig's are arbitrarily setting the PPS of their vaults based on undisclosed off chain pricing logic.
And to be clear Stream is not the exception here, this is now standard practice from almost every vault provider, including basically all of the largest players. If you are in a blah, blah USD or "Vault yada yada", "YieldCoin Whats its Nuts" or whatever, you are almost certainly subject this.
As the industry continuous to move to a less cypher punk value set, we should make sure there is a distinction between decentralization and transparency. Even in places where we move to more centralized/trusted systems, transparency should still exist in its full force. Otherwise we really are just banking but worse.
While events like this always remind me why I am embarrassed to tell people I work in crypto, so far there does seem to be a positive response and recognizing our shortfalls.
Though I am sure next cycle a new group of kids will come along claiming they've got the best risk adjusted yields around and we will run it back once again.
Our only hope is each time this happens a few more people learn to demand more out of those they trust their money to.
