Morpho Leverage Chain Risk Analysis Report

2025-11-06 UTC

TL;DR

Stream Finance's $93 million asset shortfall caused xUSD to plummet by as much as 77% , indirectly creating approximately $285 million in potential cross-protocol bad debts. Of this , $25.4 million (MEV Capital position) was exposed in Morpho , which, while not yet triggered liquidation, is under immense pressure due to 100% utilization and an 88% borrowing rate. Hard-coded oracle delays allowed bad debts to accumulate before they materialized, and the leveraged chain has already impacted Euler, Silo, and the stablecoin deUSD. $150 million in mHYPER-related positions were deleveraged within 48 hours, and the current risk margin is manageable.

Core Analysis

1. Event Overview

• Triggering event : On November 3, 2025, Stream Finance disclosed that an external fund manager had incurred a deficit of $93 million and froze withdrawals. PeckShield monitored xUSD falling from $1 to a low of $0.26 on the same day. (coinmarketcap)
• Leverage amplification : xUSD is repeatedly pledged in lending markets such as Morpho, Euler, and Silo, amplifying to approximately $285 million in outstanding debt (tracked by YAM on-chain, consistent across multiple sources).
• Liquidation is hampered : Most markets use "book value" oracles, and prices remain locked around $1, preventing automatic liquidation of borrowed LTVs that have exceeded their limits.

2. Morpho Exposure Details

3. Oracles and the Accumulation of Bad Debts

• Price spread : xUSD spot 0.26 USD vs. oracle 1 USD, resulting in a true collateral ratio of approximately 25%, but still showing a healthy on-chain performance.
• Time window : If Morpho incurs a one-time price increase after governance or oracle updates, it could suffer a maximum loss of $25.4 million ; Euler/Silo could have to recognize a combined $260 million in bad debts.
• The ripple effects : Elixir's deUSD reserves, with 65% lent to Stream, represent a potential loss of $68 million and pose a risk of secondary de-pegging. (99bitcoins)

4. mHYPER status

• On November 5th, Hyperithm announced that it had fully liquidated its $75 million mHYPER leveraged positions , completing $150 million in redemptions within 48 hours. Currently, there is no open interest in the Morpho-Midas mHYPER market. (x.com)
• The latest supply of Morpho mHYPER/USDC is 65.07 million USDC, with borrowings of 63.48 million USDC, resulting in a utilization rate of 97.6%. However, the collateral price remains stable at 1.05 USD, and there is no direct xUSD related risk.
• Midas TVL declined slightly due to redemptions (total -1.4% from November 1 to November 6).

5. Social and Market Sentiment

• Public opinion is generally bearish, viewing "DeFi Lego" as fragile and calling for auditing of oracles and curators. Analysts call xUSD's circular staking a "fake collateral" bomb. x.com
• The Morpho community defends the "kitchen is not the chef" principle, arguing that segregated vault design limits systemic risk. (x.com)
• Felix, Steakhouse, and other vaults issued statements declaring zero exposure, partially easing panic. (x.com)

6. Risk assessment of the chain of transmission

in conclusion

1. Morpho remains robust : apart from the MEV Capital xUSD market, the remaining 300+ vaults were unaffected; the isolation architecture effectively prevented systemic contagion.
2. The worst-case scenario : If the xUSD price remains low indefinitely and oracles chase the price, Morpho faces up to $25.4 million in bad debts; the entire DeFi sector would have to absorb approximately $285 million in losses.
3. Key observation points :
   • Oracle update and governance motion timeline • Stream asset recovery ratio and legal progress • deUSD / other secondary stablecoin redemption status
4. Action recommendations :
   • Avoid entering vaults with high utilization rates that include xUSD collateral; pay close attention to withdrawal difficulties if the utilization rate is >95%. • For users holding secondary stablecoins such as deUSD and scUSD, it is recommended to hedge or diversify into mainstream stablecoins. • Carefully evaluate Curator's past risk control record before deciding whether to participate in its new vaults.

Overall, this incident exposed more structural risks in oracle design and multi-level staking than inherent flaws in the Morpho protocol code itself. If oracle governance optimizations can be completed soon and curator responsibilities clearly defined, market confidence is expected to gradually recover.