How $7.5 million of unpaid loans became $14.7 billion of debt on Morpho

01 · The loan nobody can closeA market that never shut

In early November 2025, Stream Finance told its users it had lost $93 million. Its stablecoin, xUSD, lost its peg. So did deUSD, a stablecoin from Elixir that had lent much of its money to Stream, as Yahoo Finance reported.

On Morpho, one market had been lending USDC against staked deUSD, a token called sdeUSD. When deUSD broke, the loans in that market were suddenly worth far more than the tokens behind them. Nobody paid them back, and liquidators cleared about a dollar of them.

That market is still open. Its lenders cannot get their money out, and its borrowers have not repaid a dollar since November. Only the debt moves. The borrowers took about $7.4 million. By late September, the market said it was owed $6.44 billion.

Morpho is one of the biggest lending protocols on Ethereum, and it works in a different way from Aave, the biggest. On Aave, lenders share big pools. On Morpho, anyone can open a market for one pair of tokens: a token to post as collateral, a token to borrow, and a price feed that says what the collateral is worth. Most lenders never pick a market. They put money into a vault, and a curator, the team that runs the vault, spreads it across markets.

Each market sets its own interest rate. The more of its cash is out on loan, the higher the rate goes, to pull borrowers back and bring new lenders in. When every dollar is lent, the rate keeps rising until it hits a cap of 800% per year.

Bitquery rebuilt every loan ever made on Ethereum's biggest lending protocols, from Aave and Morpho to Compound, Maker and Sky, Spark and Fluid, using our Ethereum data. At the end of August 2026 the chain recorded $25.1 billion of lending debt. About $6.5 billion of it had nothing behind it at market prices, and most of that sat in a few dead markets like this one. We followed the two biggest, the lenders stuck with them, and the price feeds that let it happen.

02 · How a market diesA safety valve that needs a price

A lending market has one safety valve. When collateral loses value, bots called liquidators step in. They repay part of the loan and take some collateral at a discount, which keeps lenders whole. To do that, the market needs a price.

If the price feed says the collateral is fine, no liquidator moves. If the feed stops answering, none can. Either way the bad loan stays on the books.

Then the market freezes in the worst place. Every dollar the lenders put in is out on loan, so none of them can withdraw. The rate sits at its cap. The debt grows every second, and nobody will ever pay it. Crypto calls a market like this a zombie.

One detail makes the numbers jump. Morpho only writes the new total down when someone touches it, with a deposit, a withdrawal or a small loan. In between, the debt keeps building up without being written down.

03 · Stream's marketA price feed stuck at $1.07, then gone

The sdeUSD market opened in February, nine months before the collapse. Borrowers took tens of millions of dollars of USDC from it and paid most of it back. By the end of October the market was owed about $10.6 million, interest included, and every dollar in it was lent.

One wallet owes almost all of the debt today. Our address labels tie it to Stream Finance. Its collateral is millions of sdeUSD, worth about $2,000 in total at the price sdeUSD last traded for.

The market's price feed worked in two steps. It took how much deUSD one sdeUSD was worth, then asked a second feed what deUSD was worth. That second feed never left $1. So through November and into December, Morpho valued sdeUSD at $1.07 while it traded for cents, then for a fraction of a cent. To Morpho, the loan looked safe.

On December 19 the deUSD feed posted its last update. Since the next day, every call for a price has failed. A liquidation needs a price, so none can happen. Morpho's core contract has no admin switch that could close a market, so the loan stays open.

With no price and no cash left, the capped rate did the rest. The debt grew more than 500-fold in nine months.

04 · Who holds the paperMorpho vaults: three wrote it off, two kept counting

Every dollar a Morpho market says it is owed is also a claim held by a lender. In the sdeUSD market those claims add up to $6.44 billion on paper, spread across a handful of vaults and wallets.

Relend USDC, Usual Boosted USDC and Avantgarde USDC Core have written the market off. Their own books count almost none of it. Adpend USDC and 1337 USDC do the opposite. They count the paper interest as real assets.

The same bad loan landed very differently on each vault's depositors. Relend's share price fell by about 98% in November. Usual Boosted's dipped about 3%. Adpend's and 1337's have roughly doubled every month since, as if depositors had struck it rich on a dollar vault. Anyone who reads their size off the chain sees hundreds of millions of dollars. Neither vault has moved more than $50 on Morpho since December.

05 · The $95,000 marketA gold token priced a trillion times too high

The second market is stranger, and far smaller in real money. It is older than Stream's, and it lends USDC against PAXG, a token backed by gold. Its price feed says one PAXG is worth about $4.5 quadrillion. The real price is about $4,400. The gap is about twelve zeros, the same as the gap between the decimal places of PAXG and USDC, which points to a setup mistake.

One lender put $95,000 into the market. Two wallets borrowed it against a couple of hundred dollars of PAXG and never paid it back. Then the market sat still for a year, and so did its books, because nobody touched it.

Since last December, a handful of tiny deposits and loans have woken it up. One of those loans was backed by about a billionth of a cent of gold. Each touch wrote down a new, far bigger total. The last, in mid-September, wrote $8.24 billion.

Nobody lost billions here. The lender lost what they put in. But anything that adds up Morpho's on-chain debt counts this one at face value, right next to Stream's. Together the two read $14.7 billion.

06 · ResolvThree more markets, drained in hours

A market does not need months to die. In March this year an attacker minted about 80 million USR, Resolv's stablecoin, with nothing behind them and sold them, as The Block reported. USR traded at a dollar the day before. That day, half of all USR trades against USDC on Ethereum's DEXs cleared below 42 cents, by our DEX trade data.

Three Morpho markets lent USDC against Resolv tokens: USR itself, wstUSR (staked USR) and RLP, Resolv's insurance token. Their feeds did not follow the market. To this day they price those tokens at a dollar or more.

Borrowers moved fast. Over three days, 79 wallets borrowed $8.5 million of USDC against Resolv tokens, every dollar the three markets had. All three have been fully lent ever since, so their debt compounds at the cap.

USR broke in the hour after 2 a.m. UTC, and the first loan landed before 3 a.m. Most of the borrowing came in those first two hours, when half of all USR trades still cleared between 60 and 80 cents. By 8 a.m. USR traded around 5 cents. The three feeds did not move all day.

Resolv is not alone. In 13 cases a lender's price feed stayed far above what the token traded for. Most sit on old markets at Abracadabra, Maker and Compound. The widest gaps belong to Elixir's deUSD and sdeUSD, still priced near $1 against trades at a small fraction of a cent. Where a feed and the market disagree this much, we value the token at its traded price.

07 · How much is paperA quarter of Ethereum's lending debt

Zombie markets bend total debt, the number most people use to size DeFi lending. So we capped every loan at the market value of its collateral, and called the result real debt.

For years the two lines sat on top of each other. They split in 2025, and the gap has widened fast since June. By the end of August, about a quarter of the recorded debt had nothing behind it.

Until this summer, the biggest pile of paper debt sat outside Morpho, in Kashi, an older lending product from SushiSwap. There, a handful of forgotten markets have no cash left and charge Kashi's top rate of 1,000% per year. That pile passed $1 billion in October 2025 and stood at $1.66 billion at the end of August. Stream's market overtook it in July.

Lenders do write off bad debt when they can. Aave booked $125 million, almost all of it on May 6, 2026, when it wrote off loans backed by rsETH, a restaked ETH token. Compound's reserves absorbed $52 million over several events. Morpho books a loss only through a liquidation, so in a market where no liquidation can run, nothing is ever booked. By the end of August the paper debt was 36 times all the bad debt Ethereum's big lenders had ever booked on-chain.

Morpho's code does what it was built to do. The damage comes from the choices made around it: which price feed a market uses, and which markets a vault lends into.

08 · Before you depositHow to spot a zombie

Every sign of a zombie market sits on-chain, in plain view.

• The rate is at its cap. A market that has charged 800% for weeks has no cash left, and nobody is paying it down.
• Every dollar is lent. At 100% of cash out on loan, lenders cannot withdraw until a borrower repays.
• The feed disagrees with the market. If a token trades far below what the market's feed says, no liquidation will fire. Check when the feed last updated, too.
• A vault's share price jumps. A dollar vault whose share price climbs far above 1 is counting paper interest.

Nobody can close the sdeUSD market, because the one tool that closes a bad loan needs a price, and the price is gone. Its books will grow each time someone touches it, and so will every total that counts it. The real loss was about $7.4 million. Everything above that is paper.

09 · How we measuredWhat we counted and how we checked it

We rebuilt every loan on Ethereum's biggest lending protocols from Bitquery's on-chain data, starting from each protocol's launch. At every month end we checked our totals against each protocol's own on-chain numbers, 33,680 checks in all.

Real debt is each borrower's debt, capped at the market value of their collateral. Prices come from each protocol's own feeds first, then from DEX prices. Where a feed kept a collapsed token near $1, we used the price it traded at. Another $0.15 billion of debt sits against collateral we could not price at all, and we left it out of the $6.5 billion.

Figures for single markets and vaults are what their own contracts reported at the end of September 22, read with our smart contract API. For a lending attack of a different kind, see how a Safe module drained 2,900 rsETH from an Aave position, and how the Tectonic exploit hit a lending market on Cronos.

10 · The recordThe addresses behind the story