winners and losers in DeFi ‘risk curator’ reckoning

Highly-leveraged yield farm Stream Finance halted withdrawals on Tuesday, disclosing the loss of $93 million worth of assets held by an “external fund manager.”

The resulting depeg of Stream’s xUSD (currently down 88%) has led to concerns over the health of an interwoven ecosystem of similar high-yield vaults in the decentralized finance (DeFi) sector.

The “risk curator” model of high-risk vaults offering yields of 18% on stablecoins, as was the case with Stream’s xUSD, has since come under harsh criticism.

With “curators” taking a fee on withdrawals, their aim is to achieve higher yields to attract more deposits, while not exposing themselves to risk.

Lots of these vaults billed themselves as delta-neutral strategies. However, the custom markets used to create leverage loops on DeFi lending platforms such as Euler and Morpho, have made unwinding the positions tricky in many cases.

Read more: DeFi projects under fire for inflated TVL and murky lending loops

Ongoing

The dust is still settling, with multiple markets at 100% utilization, meaning lenders are unable to withdraw.

Protos looked at some of the curators and platforms involved to see who lost out and who (if anyone) came out on top.

Read more: Stream Finance halts withdrawals after $93M loss, xUSD depegs 75%

The losers

After a worrying period of silence, MEV Capital clarified it had exposure to Steam Finance assets on “four permissionless lending markets and one vault deployed across three L2 chains.”

The post lists approximately $34 million worth of assets as “impacted by Stream Finance shortfall.”

Re7 Labs disclosed $14.65 million of exposure to an “isolated xUSD/USDT0 cluster on Plasma” and $12.75 million of exposure to bad sdeUSD and deUSD collateral across four Euler and Morpho markets.

It stresses that mRe7YIELD and mRe7BTC strategies are unaffected.

Telos Consilium listed four affected vaults and three lending markets. The post doesn’t quantify exposure, but on Tuesday, analysts Yields and More put Telos’ exposure at $124 million.

DeFiLlama TVL data shows Telos currently holding 97M xUSD (now worth $15 million). Telos has since adjusted borrow rates so as not to force a liquidation and lock in losses, hoping debt will instead be paid down. 

According to Silo Finance’s transparency report, direct user deposits account for $15.4 million of exposure to xUSD vaults. Silo claims to be “preparing to take legal action to compel repayment of outstanding loans [by Stream Finance] and to reopen redemptions.”

Meanwhile, liquidations remain frozen.

The same Silo report lists Varlamore’s exposure as over $19 million across five xUSD vaults and Mithras’ scUSD vault exposure as $2.3 million.

Read more: $25 million Ethereum MEV exploit puts ‘Code Is Law’ on trial

In between

Gauntlet, despite claiming no xUSD exposure, was forced to pause USDC, USDS and USDT Comet markets on Compound Finance, where it acts as risk manager.

The move is in response to “a liquidity crunch in [Elixir’s] deUSD and sdeUSD.” New risk parameters were proposed last week, but have yet to pass the governance process.

Read more: Compound Finance upgrade bug freezes $830M in crypto

Elixir’s surprise disclosure that it was “the only creditor with… 1-1  [redemption] rights” with Stream undoubtedly exacerbated the rush for the exits.

Some believe that Stream also likely has creditor rights to externally managed funds, with depositors being last in line.

The permissionless lending platforms (such as Morpho and Euler) used by many of these curators may not have accrued bad debt themselves, but the model has received criticism for encouraging an obscured yield-vault arms race.

BGD Labs’ Ernesto Boado characterized it as “selling your brand to gamblers for free.”

The rush to take on more risk, and offer higher returns, has led to funds trapped in overleveraged custom markets instead of orderly liquidation as collateral degrades. 

Morpho’s Paul Frambot defended the model, highlighting how other Morpho markets remained unexposed to the shaky collateral. He also pointed to lower outflows on Morpho than elsewhere, though others noted this might have something to do with stuck funds.

Euler’s Michael Bentley echoed similar ideas of risk isolation; “Modular systems don’t promise to prevent risks, but they do help contain them.”

Both Morpho and Euler are keen to add 3rd party risk scores to vaults to better inform users before depositing.

The winners

The only real winners were those who “never touched [the] xUSD scam.” But of those who did, some managed to come out relatively unscathed.