On-chain analysts have spent the previous few days scrutinizing an online of decentralized finance (DeFi) yield farming tasks which collectively declare $950 million price of complete worth locked (TVL).
Criticisms levelled on the tasks embody that they recursively lent funds between each other’s belongings to inflate TVL, and the shortage of transparency over the positions held.
Some have additionally raised doubts over the power to unwind positions safely to be able to safe the backing of their yield-bearing stablecoins, particularly within the occasion of a liquidity crunch like that of October 10, 2025.
DeFi daisy chain
Initiatives similar to YieldFi and Stream Finance goal to generate yield by utilizing deposits to run delta-neutral methods, just like $10 billion “synthetic dollar” protocol Ethena.
They invoice themselves as “asset management for the on-chain economy” and “the SuperApp DeFi Deserves,” respectively.
DeFi commentator Togbe kicked off the dialogue with an X submit on Sunday, casting doubt upon the steadiness of positions backing yield-bearing tokens.
It attracts consideration to the aforementioned recursive lending between YieldFi’s yUSD, Stream Finance’s xUSD, and different equally designed tokens.
Customers can mint yUSD (TVL $101 million) towards different, non-yield-bearing, stablecoins and deposit right into a vault as vyUSD for 11.5% APY.
Togbe’s submit describes how vyUSD is leveraged up towards itself and different yield-bearing belongings on lending platforms Euler and Morpho.
An analogous sample is adopted by Stream Finance and its xUSD vault, which “takes advantage of market neutral strategies” to earn 18% yield on $420 million of USDC deposits.
Each methods additionally rely closely on mHYPER, one other “market-neutral, stablecoin-dominated yield strategy” providing 8% return, issued by Midas and managed by Hyperithm.
On the time of Togbe’s submit, YieldFi and Stream positions allegedly made up 30% of mHYPER’s $263 million TVL.
One other pseudonymous X consumer, going by “Schlagonia,” expanded on the considerations. They examined xUSD’s backing and its relationships, tracing related connections between xUSD and Elixir’s $166 million deUSD, additionally a “yield-bearing synthetic dollar” providing 8%.
Togbe’s submit sums up the state of affairs as a “daisy chain of circular lending… propping up [the] yield vault market” in an “I scratch your back, you scratch mine system of yield sharing.”
Opaque it ‘til you make it
The supply of knowledge on backing belongings varies wildly between tasks.
Whereas YieldFi has a transparency dashboard with hyperlinks to wallets, unpicking every place is a posh and prolonged handbook job — the precise drawback the venture claims to resolve.
Midas’ breakdown of mHYPER backing is organized equally to that of YieldFi, whereas Stream Finance says that transparency is “coming soon.” It additionally invitations customers to decipher its methods by way of a bundle of three addresses on portfolio tracker Debank.
The principle deal with (holding 97% of the bundle’s worth) has a internet worth of $169 million unfold throughout dozens of chains and DeFi protocols. Many positions are totally leveraged with dicey well being elements of 1.01 to 1.05.
Stream claims to be “currently integrating” proof of reserves, urging those that supply such companies to get in contact.
Combined responses
YieldFi responded to the criticisms, addressing considerations round backing high quality and promising an audit and proof of reserves from a third-party.
Nonetheless, Togbe notes that the query of “why [the] majority of TVL is used to lend to vyUSD inflating the total supply” is left unanswered.
Stream Finance’s 0xlaw — whose bio reads “good at losing money” — responded to the criticisms, highlighting a $10 million insurance coverage fund.
They add that proof of reserves are “in the works” however stress that “publicly displaying a lot of our positions would lead to diminishing edge.”
This assertion seems to be at odds with directing customers to the aforementioned Debank bundle.
Nonetheless, given the priority across 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 additionally weighed in, stressing that, regardless of the identify, xUSD is just not a stablecoin.
As an alternative it exists to offer common customers publicity to the kind of “high alpha hedge funds” that function methods, “from lending arbs, to incentive farming, to dynamically hedged HFT, to market making.”
Hyperithm additionally intends to scale back mHYPER provide to Euler and Morpho markets, used to loop yUSD and xUSD leverage.
In eradicating publicity to each belongings, it claims “all [mHYPER’s] recursive lending components… have been fully removed.”
Wound up too tight?
As observers have identified, the net of looped leverage could also be dangerous however, offering positions have been unwound in an orderly vogue, preliminary deposits are accounted for.
Nonetheless, Togbe continues to emphasize that the difficulty isn’t the danger itself, quite that these tasks seem like replicating equivalent, self-referential positions.
Stablecoin researcher Serenity argues that “recursive lending is not technically wrong,” however agrees that transparency is a “major concern.” It provides that it’s not tough to “disclose all relevant investments on a daily basis,” particularly when “fund managers have absolute liberty in investments.”
Infinifi’s Rob Montgomery additionally factors to how the inflated TVL creates a false sense of belief that extra depositor-dollars are keen to make use of the vaults.
He suggests utilizing two separate metrics: “notional TVL” and “user deposits.”
Bullet (hopefully) dodged
Even when the accounting provides up in concept, some are nonetheless skeptical that the tasks would be capable of unwind positions in time to avert losses, particularly during times of intense volatility.
Whereas particular tranches of funds obtainable to withdraw inside sure timeframes are displayed on venture web sites, within the wake of October 10’s sudden liquidity crunch, some discover it arduous to imagine that not one of the tasks skilled a major blow-up.
For months each yield coin and their mom was bragging about working the idea commerce.
Then final week everybody will get ADL’d and the commerce blows up
But looks like nobody main has come out with any losses from it?????
Unusual
— Schlag (@Schlagonia) October 16, 2025
Ethena’s TVL has dropped by a 3rd since that occasion. Conversely, of the tasks talked about, solely YieldFi skilled a major drop.
DeFi caters to all ranges of threat tolerance; “degenerate” experiments similar to these are to be anticipated. Some even imagine they need to be inspired to “make DeFi yield Ponzis great again.”
In the meantime, the vaults are sometimes marketed as delta-neutral, set-and-forget methods with the “institutional rigor of firms like BlackRock” for customers who is probably not conscious of what’s below the hood.
Versus different DeFi non-custodial yield optimization vaults, these tasks’ groups totally management funds, for “flexibility.”
Because the previous DeFi adage goes, in the event you don’t know the place the yield comes from… you’re the yield.
