DeFi projects under fire for inflated TVL and murky lending loops

Stream Finance’s 0xlaw — whose bio reads “good at losing money” — responded to the criticisms, highlighting a $10 million insurance fund.

They add that proof of reserves are “in the works” but stress that “publicly displaying a lot of our positions would lead to diminishing edge.”

This statement appears to be at odds with directing users to the aforementioned Debank bundle.

However, given the concern around the looped leverage of xUSD, they intend to “wind these positions down and cap them at a size base[d] off insurance fund size.”

Stream founder Soletty also weighed in, stressing that, despite the name, xUSD is not a stablecoin.

Instead it exists to give regular users exposure to the type of “high alpha hedge funds” that operate strategies, “from lending arbs, to incentive farming, to dynamically hedged HFT, to market making.”

Hyperithm also intends to reduce mHYPER supply to Euler and Morpho markets, used to loop yUSD and xUSD leverage.

In removing exposure to both assets, it claims “all [mHYPER’s] recursive lending components… have been fully removed.”

Wound up too tight?

As observers have pointed out, the web of looped leverage may be risky but, providing positions were unwound in an orderly fashion, initial deposits are accounted for.

However, Togbe continues to stress that the issue isn’t the risk itself, rather that these projects appear to be replicating identical, self-referential positions.

Stablecoin researcher Serenity argues that “recursive lending is not technically wrong,” but agrees that transparency is a “major concern.” It adds that it’s not difficult to “disclose all relevant investments on a daily basis,” especially when “fund managers have absolute liberty in investments.”

Infinifi’s Rob Montgomery also points to how the inflated TVL creates a false sense of trust that more depositor-dollars are willing to use the vaults.

He suggests using two separate metrics: “notional TVL” and “user deposits.”

Bullet (hopefully) dodged

Even if the accounting adds up in theory, some are still skeptical that the projects would be able to unwind positions in time to avert losses, especially during periods of intense volatility.

While specific tranches of funds available to withdraw within certain timeframes are displayed on project websites, in the wake of October 10’s sudden liquidity crunch, some find it hard to believe that none of the projects experienced a significant blow-up.