Leverage Unwinds and Liquidity Tightens Across Crypto
In this report:
Smart Contract Risk Re-Emerges — The Balancer Exploit
DeFi Risk Climbs as Stablecoin and Lending Stress Deepen
Caution to Collateral: Banks Advance Toward Crypto Integration
Market Update
October’s euphoric rally gave way to one of the most violent deleveraging episodes since 2021. BTC’s surge to around $125k and ETH’s push to around $4.5k were abruptly reversed by the Oct. 10 liquidation cascade, which erased tens of billions in open interest and drained liquidity across CEX and DeFi venues. From there, market structure weakened further—front-end vols stayed bid, skew remained put-heavy, and funding flipped negative as traders de-risked across the board.
Through November, selling pressure persisted as ETF inflows reversed to multi-day outflows and perceived large-scale profit taking by whales intensified. BTC now trades below $90k, ETH below $3k, and SOL around $130. Funding rates have turned deeply negative across high-beta and perpetual-heavy names—SOL, AVAX, SUI. Even majors like ETH, XRP, and LINK saw sustained sub-zero funding. Privacy tokens such as ZEC, despite outperformance in spot, have seen some of the most negative funding prints (at times dropping below –300% funding APR), as short-side hedging demand surged during the unwind.
The deleveraging wave also rippled through on-chain credit markets. Aave’s TVL dropped sharply from ~$30B in October to ~$22B in November as liquidity providers withdrew capital amid market stress and the Ethena USDe unwind, which saw supplied collateral on Aave Ethereum V3 fall sharply, with over $1 billion of these assets migrating to Plasma. With funding deeply negative and collateral valuations compressed, credit markets are recalibrating for a more risk-sensitive environment where liquidity, counterparty quality, and dynamic margining are taking on greater importance relative to simple yield percentage.
Key trends
001
Smart Contract Risk Re-Emerges — The Balancer Exploit
Balancer V2 experienced a significant security breach this month after an attacker exploited a flaw in the protocol’s vault math, allowing funds to be drained from several liquidity pools. The weakness lay in a calculation error that could be triggered through highly precise, automated code execution. Galaxy Research, in its Weekly Top Stories (Nov 7, 2025), observed that the incident reflects how DeFi protocols, even when well-established and audited, remain vulnerable to increasingly sophisticated exploit methods — some potentially aided by AI tools.
From a lending standpoint, the event reinforces the need for ongoing risk evaluation and diversification. Static audits or one-time due diligence is not sufficient as DeFi systems become more interconnected. Continuous monitoring of protocol performance, liquidity exposure, and smart contract stability is essential to mitigate potential spillover effects from similar on-chain disruptions.
002
DeFi Risk Climbs as Stablecoin and Lending Stress Deepen
DeFi markets experienced heightened strain in early November as several stablecoins lost their pegs and liquidity conditions tightened across major lending protocols. Stream Finance’s xUSD broke peg after reporting roughly $93 million in losses linked to an external fund manager, leading to frozen deposits and renewed scrutiny of rehypothecation practices in curator-managed vaults. As many DeFi lending markets accept these synthetic or yield-bearing stablecoins as collateral, a loss of confidence or a depeg event could quickly erode the solvency of the collateral pools. The disruption spread across protocols such as Euler, Morpho, and Silo, where xUSD exposure contributed to liquidations and capital shortfalls.
The fallout spread to Elixir’s deUSD and sdeUSD markets, where utilization reached 100% across multiple chains. Stable Labs’ USDX also deviated from its peg, adding to volatility in synthetic-collateral markets. These episodes highlight how the goalposts for what qualifies as a “stablecoin” have shifted—many of the tokens experiencing stress resemble hedge funds wrapped in a dollar rather than the cash-backed, transparent structures traditionally associated with the term.
Collectively, these developments point to elevated systemic risk in decentralized credit. High utilization, thinner liquidity buffers, poor secondary liquidity for synthetic assets, and multi-protocol leverage loops continue to challenge market stability. The sequence of failure reinforces the need for conservative LTVs, tighter borrower due diligence, and more active monitoring of curator-driven markets to prevent localized stress from escalating into ecosystem-wide dislocation.
003
From Caution to Collateral: Banks Advance Toward Crypto Integration
Traditional finance took meaningful steps toward digital-asset adoption this month. JPMorgan is reportedly preparing to let institutional clients use Bitcoin and Ethereum as loan collateral by the end of the year — a landmark shift for a bank once known for its cautious approach to crypto. The digital assets would be safeguarded by a regulated third-party custodian, underscoring how major banks are beginning to trust cryptocurrency within traditional credit frameworks.
Meanwhile, Coinbase and Citi unveiled a partnership aimed at modernizing digital-asset payments for institutions. The collaboration will leverage Coinbase’s infrastructure to enable faster fiat-to-crypto transfers across Citi’s network, with plans to extend into 24/7 cross-border settlements and stablecoin-based payment rails.
In parallel, Morgan Stanley is gearing up to introduce crypto trading on its E*Trade platform, giving retail investors direct access to leading tokens like BTC and ETH as early as 2026.
Taken together, these moves mark a pivotal phase in the convergence of crypto and traditional finance. Digital assets are shifting from the margins of speculation to the foundation of mainstream banking and brokerage. For lenders, this evolution brings broader collateral choices and deeper liquidity pools, but also demands stronger credit models, enhanced collateral oversight, and improved volatility management as crypto assets enter conventional lending and capital markets.
Notable News:
Galaxy Provides $11M Secured Facility in LM Funding Share Repurchase
Galaxy Supports Exodus Acquisition with Bitcoin-Secured Credit Facility
Ethereum validator queue grows with 1.5 million ETH waiting to start staking
Citi to tie up with Coinbase to boost digital payments for institutional clients
Stream Finance Hard With $93M Loss, XUSD Stablecoin Depegs to New Low
Aave Labs Acquires Stable Finance, Expands Consumer Access to Onchain Savings
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