Balancer vulnerability and XUSD de-pegging trigger panic! $231 million in DeFi funds evaporate instantly.

Balancer V2 vulnerabilities erupted this week, with attackers stealing $128 million across multiple chains. Simultaneously, Stream Finance froze deposits and withdrawals after an external fund manager disclosed a $93 million loss, causing its staked stablecoin XUSD to depeg from the dollar, dropping as low as 30 cents during trading. These two incidents resulted in total losses of approximately $231 million, with only about $19 million recovered.

StakeWise Recovers $19 Million in a DAO Miracle

(Source: X)

StakeWise’s response provides strong evidence that DeFi’s emergency infrastructure can withstand significant stress. The DAO’s multi-signature triggered a contract call, returning control of the protocol to the DAO and transferring 5,041 osETH and 13,495 osGNO tokens. The team committed to distributing losses proportionally based on pre-attack balances, turning a catastrophic event into a partial loss. This is not just theoretical: funds have been moved on-chain, the DAO publicly announced the plan, and multiple media outlets confirmed the data.

Speed and results are equally important. Traditional finance might take months of litigation to recover assets, often recovering only a tiny fraction. StakeWise leveraged protocol-native tools to complete recovery within days. This efficiency highlights DeFi’s advantage: when emergency mechanisms are well-designed, response times can far surpass those of traditional systems.

StakeWise managed to recover about 15% of the total Balancer loss thanks to years of built-in mechanisms: emergency multi-signature controls, contract-level recovery functions, and a DAO governance structure capable of executing transactions within a single block cycle. These three mechanisms made StakeWise’s recovery possible.

Three Key Mechanisms Behind StakeWise’s Recovery

Emergency Multi-Signature: Limited, predefined authority to prevent abuse while enabling rapid response.

Contract-Level Recovery Functions: Allow governance to revoke specific transactions via smart contract backdoors.

Fast DAO Structure: Capable of voting and executing within a single block, avoiding lengthy governance processes.

Berachain added a fourth option—chain-level intervention via validator consensus. Running Balancer-style pools on its native DEX, validators coordinated a network halt, executed an emergency hard fork to isolate vulnerable contracts, and restored operations after controlling the vulnerability. This approach involves pausing and rolling back, only effective when the blockchain is still young and sufficiently centralized to coordinate validator actions without governance deadlock.

XUSD Collapse Exposes Structural Flaws in CeDeFi

At the same time as the Balancer vulnerability, Stream Finance froze deposits and withdrawals after an external fund manager disclosed a $93 million loss, causing its staked stablecoin XUSD to depeg from the dollar, plummeting to as low as 30-50 cents during trading. This collapse differs fundamentally from the Balancer smart contract exploit; it exposes the structural fragility of CeDeFi (centralized + decentralized hybrid finance).

Stream’s failure stems from a structural bet on hybrid CeDeFi, relying on external managers for yield farming without real-time risk dashboards or transparent collateral monitoring. The $93 million vanished off-chain, beyond the scope of smart contract or validator coordination. What measures worked, what failed—these are critical questions, as they determine the tools available for future multi-hundred-million-dollar breaches.

This mechanism differs from smart contract exploits because no attacker drained the liquidity pool; there was no validator coordination to reverse losses, nor DAO voting to recover third-party off-chain funds. This is the original compromise of CeDeFi: protocols promise composability and on-chain transparency, but yield is obtained through traditional fund managers operating under entirely different risk frameworks.

When external managers fail due to fraud, mismanagement, or market losses, the stablecoins backed by those funds lose their peg, and the protocol has no emergency measures. Users find out too late—trusting “decentralized” stablecoins that depend on entities they’ve never met, operating in jurisdictions they cannot access, and never reviewed terms.

Stream hired Perkins Coie for investigation, but the damage has spread. The protocol’s staked stablecoin XUSD sharply depegged, with reports indicating its intraday price fell to 50-70% of par. Such severe depegging is rare in stablecoin history, second only to the UST collapse. Theoretically pegged at $1.26, XUSD’s price dropped to $0.30–$0.60, causing over 70% losses for holders.

$231 Million Loss and Only 8.2% Recovery Rate: The Harsh Reality

The numbers reveal the limits of emergency mechanisms immediately. StakeWise recovered $19.3 million from the $128 million Balancer loss—about 15%. As of press time, Balancer’s bug bounty remains unclaimed. Berachain’s chain-level protections safeguarded its ecosystem but cannot reverse transactions on Ethereum mainnet or other affected chains. Including Stream’s $93 million loss, total damages reach roughly $231 million, with only about $19 million recovered—an 8.2% recovery rate.

While DeFi’s tools mitigated some damage, users still lost over $200 million. The toolbox isn’t empty, but it’s insufficient against attackers who understand protocols better than auditors, are more determined, and possess more advanced skills. This stark figure underscores a harsh reality: despite continuous improvements in defense mechanisms, attacker techniques evolve just as fast, and protective tools haven’t kept pace with the expanding attack surface.

Emergency multi-signatures and recovery functions raise the bottom line for victims, as it’s no longer assumed that all value is unrecoverable. However, they also introduce moral hazard: protocols might neglect security audits, trusting governance to patch losses afterward. Regulators will notice: if DAOs can revoke transactions and freeze funds, they effectively control the network as trustees.

This could lead to policy pressures for reserve proof dashboards, mandatory risk disclosures, and stricter licensing for projects labeled “decentralized.” For investors, due diligence premiums are increasing. Yield products built on opaque external managers or hybrid CeDeFi structures now face new risks: catastrophic, irreversible losses that can break stablecoin pegs.

Macroeconomic factors intensify risks. Chainalysis estimates that by mid-2025, crypto thefts will surpass $2.17 billion—already exceeding the total for 2024. If current trends continue, losses could reach $4 billion. DeFi isn’t the only target, but it remains the most liquid and vulnerable sector.

Two Visions of DeFi Defense and the Final Test

The series of measures involving Balancer, StakeWise, and Stream isn’t a one-off but a stress test of two competing visions for DeFi’s future. One believes that emergency governance, contract-level controls, and validator coordination can establish credible defenses, narrowing attacker windows and limiting losses. StakeWise’s 15% recovery and Berachain’s quick hard fork demonstrate this viability.

The other embraces a hybrid model—on-chain transparency in exchange for off-chain yields, accepting counterparty risk as the cost of competitive returns. Stream’s collapse exemplifies this vision’s failure. The protocol entrusted $93 million to external managers but lacked real-time monitoring and transparent disclosures. When losses occurred, there was no effective response.

Both visions coexist today, with users allocating funds between protocols accordingly. The key isn’t whether attacks will happen but whether DeFi can sufficiently protect itself to remain a reliable alternative outside traditional finance. StakeWise’s recovery proves tools exist; Stream’s failure shows these tools can’t cover all attack vectors.

Real-time risk dashboards, transparent collateral monitoring, and on-chain reserve proofs are no longer optional—they are fundamental. Protocols unwilling or unable to publish these metrics will face valuation losses, and that’s only fair.