Dear Gitcoin community, given recent events and as a follow-up to the November 6th addendum, we are here providing another update:
As you may be aware, the market was shaken by recent events surrounding Stream Finance and its yield strategy xUSD, which announced a $93 million loss last week and subsequently halted all withdrawals. Among other things, this event had an immediate and severe domino effect on Elixir, which had significant exposure to Stream. The loss of this backing caused Elixir’s deUSD stablecoin to de-peg and collapse, evaporating liquidity across the ecosystem and preventing withdrawals on underlying Morpho vaults, impacting a number of players in the space.
Our vaults had zero direct exposure to xUSD, nor did we have exposure to any Morpho markets where xUSD was used as collateral. The primary knock-on effect we have been monitoring is with Elixir’s deUSD, as Elixir (the entity) has lending exposure to Stream. Due to the uncertainty surrounding Elixir’s exposure to Stream, the sdeUSD market on Morpho became illiquid, with all supply being borrowed. The Avantgarde USDC Morpho vault had a ~2% position, allocated to lending USDC to the sdeUSD market on Morpho. Due to our internal risk management framework and portfolio constraints at each allocation layer, the lookthrough exposure to the affected Morpho market was limited to ~1% in the DeFi Yield Vault where the DAO is invested.
To prevent the position from growing as it accrues an exponential amount of interest and protect against further impact, we redeemed the liquid ~98% of the vault’s assets from this specific Morpho vault to segregate the funds while leaving the distressed 2% exposure to the sdeUSD market contained within the Morpho vault contract. That 98% liquid component has been moved to Aave as a temporary, defensive measure where they are currently earning a safe baseline yield, pending redeployment into the new, upgraded Morpho v2 vaults which we had already been in the process of building a migration plan for.
Segregating the funds ensures that all future on-chain accounting for the main, healthy portion of the vault is accurate and, importantly, enables the DAO to retain their full claim on any potential recovery value from the isolated 2% position. The resolution of the sdeUSD position remains unclear. If the loan is repaid (the 2% exposure), there is potential upside as Stream’s debt grows (currently accruing a yield north of 200% APR), though this recovery remains highly uncertain.
We will continue to monitor the situation and will update the DAO if any recovery becomes possible. Thank you for your continued trust in us, we are proud to be serving the Gitcoin community.