1011 The first corpse of the crash day: Stream's fake neutral strategy exposed

Author: Trading Strategy; Translated by: Wu Blockchain

Stream xUSD is a tokenized hedge fund disguised as a DeFi stablecoin, claiming to use a delta-neutral strategy. Currently, Stream is in trouble under suspicious circumstances. Over the past five years, several projects have followed this strategy, attempting to generate income through delta-neutral investments to launch their own tokens. Some successful examples include MakerDAO, Frax, Ohm, Aave, Ethena.

Unlike many more genuine DeFi competitors, Stream lacks transparency regarding its strategies and positions. On portfolio trackers like DeBank, only $150 million of the claimed $500 million TVL is on-chain visible. It has been revealed that Stream invested in off-chain trading strategies operated by proprietary traders, some of whom faced liquidation, resulting in a claimed loss of $100 million.

As CCN reported, the $120 million Balancer DEX hack on Monday is unrelated to this matter.

It is rumored (though unconfirmed, as Stream has not disclosed this) that off-chain trading strategies involving “selling volatility” may be involved. In quantitative finance, “selling volatility” (also known as “short volatility” or “short vol”) refers to trading strategies that profit when market volatility declines, remains stable, or when actual volatility is below the implied volatility priced into financial instruments. If the underlying asset’s price doesn’t fluctuate significantly (i.e., low volatility), options may expire worthless, allowing the seller to keep the premium as profit. However, this approach carries significant risk because a sudden spike in volatility can lead to huge losses — often described as “picking up nickels in front of a steamroller.”

During 1011, we also experienced such a “volatility spike.” In 2025, the frenzy around Donald Trump fueled long-term systemic leverage risks in the crypto market. When Trump announced new tariffs, all markets plunged into panic, affecting the cryptocurrency market as well. In the panic, front-running selling was key, leading to chain liquidations.

Due to the long-term buildup of leverage risk, systemic leverage reached high levels, and the perpetual futures market lacked sufficient depth to unwind and liquidate all leveraged positions smoothly. In this scenario, auto-deleveraging (ADL) systems activated, socializing losses onto profitable market participants. This further distorted an already frenzied market.

The volatility caused by this event was a once-in-a-decade occurrence in the crypto market. While similar declines appeared in early 2016, we lack good data from that period, so most algorithmic traders based their strategies on recent “smoothed volatility” data. Since such surges have not been seen recently, even positions with ~2x leverage were liquidated.

Maxim Shilo, founding partner of a crypto quantitative trading firm, analyzed the impact of this event on algorithmic traders and how crypto trading might permanently change after 1011: strategies relying on stable, trending market conditions proved highly vulnerable to catastrophic failure. Without circuit breaker logic, tail risk hedging, or rapid deleveraging protocols, managers faced capital destruction that traditional risk models failed to predict. Every strategy must be rebuilt with 1011 as a new baseline, rather than viewed as a historical anomaly. Recognizing this shift and adjusting frameworks quickly will be key for asset allocators and managers to capture institutional capital flows in the next phase of crypto evolution. [Note: Maxim Shilo’s full analysis can be found in the referenced article “Deleveraging: Why 90% of Crypto Funds Are Down 50% This Year and What Has Forever Changed”]

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Now, the first “corpses” of the 1011 event have surfaced, and Stream has taken a hit.

A delta-neutral fund is defined as one that cannot lose money. If it does, it’s no longer delta-neutral by definition. Stream claimed to be delta-neutral but secretly invested in proprietary, non-transparent off-chain strategies. Delta-neutral is not always black and white; hindsight makes it easier to judge. Many experts might consider these strategies too risky to be truly delta-neutral, as they can backfire — and indeed, they did. When Stream lost principal on these poor trades, it became insolvent.

DeFi is inherently risky, and losses are always possible. If you can still recover 100% of your dollars, a 10% decline isn’t catastrophic at an annualized return of 15%. But in this case, Stream also leveraged itself to the extreme through a recursive lending strategy with another stablecoin, Elixir.

Worse still, Elixir claims “priority” over its principal in the event of Stream’s bankruptcy, meaning Elixir could recover more funds, leaving other DeFi investors with less or nothing.

Due to lack of transparency, recursive strategies, and proprietary tactics, we don’t know the full extent of losses suffered by Stream users. Currently, the Stream xUSD stablecoin is trading at $0.15.

Because this situation was not disclosed to DeFi users, many are now extremely angry at both Stream and Elixir: not only have they lost money, but their losses have been socialized to ensure wealthy Americans with Wall Street backgrounds continue to profit.

This incident also impacts lending protocols and their curators:

“All those who think they are lending against collateral positions on Euler are actually engaging in unsecured lending via proxies,” — Rob from infiniFi.

Furthermore, due to Stream’s lack of transparency regarding its positions and P&L, and on-chain data, users have begun to suspect that Stream may have fraudulently diverted user profits to fund the management team. Stream xUSD stakers rely on Stream’s self-reported “oracle” to generate profits, but third parties cannot verify whether calculations are correct or fair.

How to respond?

Events like Stream are avoidable in the young DeFi industry. The “high risk, high reward” rule always applies. But to apply this rule, one must first understand the risks: not all risks are equal, and some are redundant. Several reputable protocols for yield farming, lending, and stablecoins as tokenized hedge funds are transparent about their risks, strategies, and positions.

Aave founder Stani discussed the risks of DeFi curators and over-leverage:

The survival of DeFi lending depends on trust. One of the biggest mistakes is trying to compare DeFi lending to AMM pools, as their mechanisms are entirely different.

Lending only works when people believe the market is sound, collateral is reliable, risk parameters are reasonable, and the entire system is stable. Once that trust is broken, on-chain bank runs can occur.

Therefore, any permissionless creation of lending pools and promotion on the same platform has inherent vulnerabilities. Since most strategies are now commoditized, curators have little incentive to differentiate themselves. They either lower fees to attract users or take on more risk to attract funds from other pools.

Eventually, a major failure could destroy confidence in the entire industry and set it back. The next Terra Luna moment could come from reckless curators on open platforms.