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.