War. War Never Change.
The direct triggers for the October 11th and November 3rd incidents were not yield-bearing stablecoins, but they dramatically dealt successive blows to USDe and xUSD. Aave's hardcoding of USDe's peg to USDT prevented the crisis on Binance from spreading to the blockchain, and Ethena's own minting/redemption mechanism remained unaffected.
However, the same hardcoding prevented xUSD from immediately collapsing, causing it to enter a prolonged period of stagnation. The bad debts of the issuer Stream could not be cleared in a timely manner, and related party Elixir and its YBS (yield-bearing stablecoin) product deUSD also faced scrutiny.
In addition, multiple Curators on Euler and Morpho accept xUSD assets, causing user assets to randomly explode across various Vaults. Lacking the emergency response role of the Federal Reserve in the SVB, a potential liquidity crisis is looming. This could amplify a single crisis into an industry-wide upheaval, as xUSD moves beyond its fallen curators and embarks on a perpetual war. Curators + Leverage: The Source of the Crisis? It's not leverage that causes the crisis; the private transactions between protocols lead to a lack of transparency, lowering users' psychological defenses. During a crisis, the following two points form the basis for determining liability: 1. The under-issuance of xUSD through leveraged cycles by Stream and Elixir makes their management teams the main culprits; 2. The Curated Markets of lending platforms like Euler/Morpho accepted the "toxic asset" xUSD, and the platforms and their managers should bear joint liability; Let's reserve our opinion for now and examine the operating mechanism of YBS, compared to USDT/USDC. The operating logic of Tether/Circle is that US dollars (including US Treasury bonds) are deposited in banks, and Tether/Circle mints an equivalent amount of stablecoins. Tether/Circle earns deposit interest or Treasury bond interest, and the usage of stablecoins in turn supports Tether/Circle's profit margin. YBS's operating logic is slightly different. Theoretically, it will use an over-collateralization mechanism, that is, issuing $1 of stablecoins for every $1 of collateral. This is then invested in DeFi protocols, and after earning returns and distributing them to holders, the remainder is its own profit; this is the essence of its returns. Image Description: YBS Minting, Profits, and Redemption Process Image Source: @zuoyeweb3 Theory is not reality. Under the pressure of high interest rates, the YBS project team has developed three "cheating" methods to improve its profitability: 1. Converting the over-collateralization mechanism into under-collateralization. Directly reducing the value of collateral is foolish and basically ineffective, but corresponding strategies are also evolving: The combination of "expensive" and "cheap" assets provides support, with USD cash (including US Treasury bonds) being the safest, and BTC/ETH also relatively safe. However, TRX also supports USDD, so its value is discounted. The combination of on-chain and off-chain assets is not a bug, but a form of time arbitrage. It ensures that assets are in the correct position during auditing. Most YBSs adopt this mechanism, so no specific example will be given. 2. Enhance leverage. After YBS is minted, it will be invested in DeFi protocols, mainly various lending platforms, and ideally mixed with mainstream assets such as USDC/ETH: Maximize leverage to the extreme, using $1 as $100, potentially maximizing profits. For example, the revolving loan combination of Ethena and Aave/Pendle, with a conservative estimate of 5 revolving cycles, can achieve approximately 4.6x Supply leverage and 3.6x Borrow leverage. Use less asset to leverage, for example, Curve's Yield Basis once planned to directly issue more YBS. crvUSD, in fact, reduces the amount of capital required for leverage. Therefore, xUSD employs a combination of tactics: upfront leverage and cyclical issuance. This is xUSD's version mechanism. Observing the diagram above, we can see that YBS enters a yield "strategy" after minting, which is essentially a process of increasing leverage. However, xUSD and deUSD work together to migrate this to the issuance process. Therefore, users can see both the over-collateralization rate and the yield strategy. But this is entirely a smokescreen by Stream; Stream acts as both referee and player, making xUSD an under-collateralized YBS. Using the leverage from the second step to increase the issuance of xUSD in the first step, relying on Elixir's deUSD to leverage around 4 times, isn't a large amount. The problem lies in the fact that Stream controls 60% of the issuance. When it's profitable, it keeps the profits for itself, but in the event of a collapse, it also bears the bad debts, failing to achieve the most important aspect of a liquidation mechanism: loss socialization. The question is, why would Stream and Elixir do this? In fact, direct exchange between protocols is nothing new. When Ethena introduced CEX capital, it gained partial exemption from ADL liquidation. Returning to xUSD, among the responses from many vault managers, Re7's was the most interesting: "We recognized the risks, but we still listed it due to strong user requests." Image Description: Re7's Response
Image Source: @Re7Labs
In fact, vault managers on platforms like Euler/Morpho can definitely identify the problems with YBS, but due to APY and profit requirements, some will accept it voluntarily or involuntarily. Stream doesn't need to convince all managers; it just needs to avoid being rejected by everyone.

Image Source: @Re7Labs
In fact, vault managers on platforms like Euler/Morpho can definitely identify the problems with YBS, but under the pressure of APY and profit requirements, some will accept it voluntarily or involuntarily. Stream doesn't need to convince all managers; it just needs to avoid being rejected by everyone.

Image Description: Re7's Response
Image Source: @Re7Labs
In fact, vault managers on platforms like Euler/Morpho can definitely identify the problems with YBS, but due to APY and profit requirements, some will accept it voluntarily or involuntarily.
The administrators who accepted xUSD certainly bear responsibility, but this is a process of natural selection. Aave wasn't built in a day; it grew through continuous crises. Would relying solely on Aave make the market safer? Actually, no. If Aave were the only lending platform in the market, it would become the sole source of systemic crisis. Platforms like Euler/Morpho represent a decentralized market or a "new third board" mechanism, offering more flexible allocation strategies and lower entry barriers, which are crucial for the widespread adoption of DeFi. However, the problem remains opaque. Euler/Morpho's curators essentially allow third-party sellers to exist, while Aave/Fluid is entirely self-operated, meaning Aave handles security when interacting with Aave. However, Euler's curators manage a portion of its vaults, a point the platform intentionally or unintentionally obscures. In other words, platforms like Euler/Morpho lower users' defenses and due diligence expectations. If these platforms adopted a friendly fork like Aave or a liquidity backend aggregation like HL, while maintaining absolute separation between the frontend and branding, they would face far less criticism. How should retail investors protect themselves? Every DeFi dream ultimately ends with ringing the doorbell for retail investors. As the main public blockchain supporting DeFi, Vitalik is not so fond of DeFi. He has long advocated that non-financial innovation should occur on Ethereum. However, he is genuinely concerned for retail investors. Since DeFi cannot be eliminated, he has begun to advocate for Low Risk DeFi to empower the poor around the world. Image caption: Vitalik's view of DeFi and the real world. Image source: @zuoyeweb3. Unfortunately, what he imagined was never reality, and people have long believed that DeFi is a high-risk, high-return product. This was certainly true during the 2020 DeFi Summer, with returns often exceeding 100%. But now, even 10% is suspected of being a Ponzi scheme. The bad news is there are no high returns; the good news is there are no high risks. Image Description: Ethereum Loss Rate Image Source: @VitalikButerin Whether it's data provided by Vitalik or data from more professional research institutions, the security level of DeFi is indeed rising. Compared to the 1011 Binance liquidation data and the huge theft of Bybit, the collapse and losses of DeFi, especially YBS, are negligible. However! However, this doesn't mean we should rush into DeFi with confidence. The key is that while centralized exchanges (CEXs) are becoming increasingly transparent, DeFi is becoming increasingly opaque. The era of regulatory arbitrage in CEXs is over, but the era of relaxed regulation in DeFi has returned. This certainly has its advantages, but despite being called DeFi, it's increasingly centralized. There are too many hidden terms between protocols and between administrators that are unknown to outsiders. What we perceive as on-chain collaboration is code, but it's actually Telegram's commission rates. Many administrators of xUSD released Telegram screenshots, and their decisions will directly impact the future of retail investors. Demanding regulation from them is not very meaningful. The core is still to combine usable modules starting from the chain. Don't forget that over-collateralization, PSM, x*y=k, and Health Factor are sufficient to support the macro activities of DeFi. In 2025, the entire YBS-supported Yield will be nothing more than the following: YBS assets, leveraged Yield strategies, and lending protocols, not countless. For example, Aave/Morpho/Euler/Fluid and Pendle meet 80% of the interaction needs. Opaque management leads to strategy failure. The administrator has not demonstrated better strategy setting capabilities, and the elimination process will only occur after each problem. Beyond this, retail investors can only try to see through everything, but frankly, this is not easy. Theoretically, both xUSD and deUSD minting involve over-collateralization, but mixing the two causes the leverage process, which should have occurred after minting, to occur during the minting stage, meaning xUSD is not actually over-collateralized. When YBS is minted based on another YBS, the resulting collateral ratio becomes very difficult to discern. Until a product that penetrates all barriers emerges, retail investors can only rely on the following beliefs to protect themselves: 1. Systemic crises are not crises (socialized). Participating in mainstream DeFi products implies security. Insecurity is unpredictable and unavoidable; the problems with Aave foreshadow the decline or restart of DeFi. 2. Don't rely on KOLs/media. Participating in projects is a subjective choice (all judgments are our own thoughts). News merely reminds us "this product exists." Regardless of KOL reminders, warnings, trading recommendations, or DYOR disclaimers, ultimately, you must make your own judgment. Professional traders shouldn't even look at news, but rely solely on data for decision-making. 3. The pursuit of high returns is not necessarily more dangerous than low-yield products. This is a counterintuitive judgment, but it can be viewed using Bayesian thinking. High returns don't necessarily lead to defaults, and high risk is minimal; low returns don't necessarily lead to defaults, and low risk is significant. However, we cannot quantify the ratio between the two, i.e., derive the odds. In simpler terms, the two are independent events. Use external data to revise our beliefs, but don't seek data support for your beliefs. Furthermore, there's no need to overly worry about the market's self-correcting ability. It's not that retail investors pursue volatility returns, but rather that funds seek liquidity. When all funds retreat to Bitcoin or USDT/USDC standards, the market will automatically induce them to pursue volatility. That is, stability creates new volatility, and volatility crises trigger a pursuit of stability. You can look at the history of negative interest rates; liquidity is the eternal buzzing of finance, and volatility and stability are two sides of the same coin. In conclusion, retail investors need to do two things in the upcoming YBS market: 1. Seek data, penetrating all data, penetrating leverage ratios and reserves. Transparent data doesn't lie; don't rely on opinions to evaluate facts; 2. Embrace strategies, continuously cyclically adding/de-leveraging. Simply reducing leverage doesn't guarantee safety; always ensure your strategy includes exit costs; 3. Control losses. You can't control the percentage of losses, but you can set your own psychological position based on points 1 and 2, and then take responsibility for your own judgment.