On October 11, 2025, the crypto market experienced unprecedented volatility, with a total liquidation amount exceeding 20 billion USD across the entire network, Bitcoin plummeting 15% in a single day, and many altcoins instantaneously crashing by 80% to 90%.
The root of this crisis is not a single external factor, but rather the systemic risks that have long existed within the crypto market—the collective loss of control over the USDe circular lending strategy.
01 Crisis Overview, Tariffs Ignite the Leverage Powder Keg
The fuse of this crisis came from former US President Trump’s social media statement. He announced plans to impose an additional 100% tariff on all Chinese imports starting from November 1.
The global market fell in response, with the Nasdaq index plummeting more than 3.5% and the S&P 500 index dropping nearly 3%.
Compared to traditional financial markets, the cryptocurrency market reacts much more violently. Bitcoin price After plunging 15% from the intraday high, many altcoins suffered a catastrophic flash crash, with prices dropping 70% to 90% in a short period.
However, the macro policy shocks are just the surface; the real hidden dangers have long been buried within the crypto market — an overly leveraged trading structure and the fragile financial pyramid built on the USDe circular borrowing.
02 USD trap, the siren song of yields
USDe, launched by Ethena Labs, is a "synthetic dollar" stablecoin, which saw its market cap grow to approximately $14 billion before the crash, making it the third largest stablecoin in the world.
Unlike USDT or USDC, USDe does not rely on equivalent dollar reserves but maintains price stability through a strategy called "Delta-neutral hedging."
The strategy is as follows: hold a long position in Ethereum spot while shorting an equivalent ETH perpetual contract on a derivatives exchange.
USD itself can provide a basic annualized yield of 12% to 15%, mainly derived from the funding rate of perpetual contracts.
What truly pushes the risk to the extreme is the so-called "circular lending" strategy, which can amplify the annual yield to an astonishing 18% to 24%, and some even claim it can reach 40% to 50%.
03 Circulating Loan Mechanism, Super Leverage Manufacturing Factory
The operation process of circular lending is like a meticulously designed financial magic trick:
- Investors will hold the USDe they possess as collateral in the lending agreement.
- According to the platform’s lending value ratio, lend out another stablecoin, such as USDC.
- Exchange the borrowed USDC back to USDe on the market.
- Deposit the newly acquired USD again into the lending protocol to increase the total collateral value.
- Repeat the above steps 4 to 5 times, the initial principal can be magnified nearly four times.
Taking an initial capital of 100,000 USD as an example, after five rounds of cycles, it can leverage a total position of over 360,000 USD.
The core vulnerability of this structure is that a slight decline in the total value of the USDe position (for example, a 25% drop) is sufficient to completely erode 100% of the initial capital, thus triggering a forced liquidation of the entire position.
04 The process of collapse, the chain reaction of spiral liquidation
When tariff news triggers an initial market decline, those who use altcoins as collateral to borrow stablecoins for participation in the USDe circular loans are the first to be affected.
The value of altcoin assets used as collateral has declined, resulting in an increase in their LTV ratio in the first layer of leverage. As the LTV ratio approaches the liquidation threshold, they received a margin call notification.
To respond to the margin call, these large holders began to dismantle their circular borrowing positions in USDe. This triggered huge selling pressure of USDe against USDC/USDT in the exchange market.
Due to the relatively weak liquidity of USDe in spot trading on the exchange, this concentrated selling pressure instantly collapsed its price, causing USDe to severely decouple on multiple platforms, with the price once dropping to between 0.62 USD and 0.66 USD.
Worse still, at the critical moment of the crash, the ETH withdrawal function on the Binance platform was obstructed. Users were unable to transfer USDe out for on-chain redemption, and the arbitrage path was interrupted.
This has caused the USDe price on Binance to form a "price island," making it impossible to restore the peg through conventional arbitrage mechanisms, exacerbating the downward trend.
05 Market Maker Role, Creator of Liquidity Vacuum
Market makers are originally providers of market liquidity, but their extreme pursuit of capital efficiency has turned their "unified account" structure into a passive leverage collapse vehicle during crises.
Market makers commonly use unified accounts or full-margin models provided by mainstream CEX, using all assets as unified collateral for their derivative positions.
They tend to use illiquid altcoins as core collateral to maximize capital efficiency.
When the price of altcoin collateral plummets, the margin value of the market maker’s account instantaneously shrinks significantly, passively doubling its effective leverage ratio (for example, from 2x to 4x), triggering the liquidation of the exchange’s risk engine.
The exchange’s clearing engine is activated, which not only clears collateral that has significantly depreciated in value but also forcibly sells any liquid assets in the market maker’s account (such as BNSOL, WBETH spot) to cover margin gaps.
At the same time as its own account was being liquidated, the market maker’s automated trading system also executed its primary risk management instruction: to withdraw liquidity from the market.
They massively canceled buy orders on thousands of altcoin trading pairs to recoup funds. This caused a catastrophic "liquidity vacuum."
At a time when the market is flooded with a large number of sell orders, the main buyer support in the market suddenly disappeared. This perfectly explains why altcoins can experience such a drastic flash crash: due to the lack of buy orders on the order book, a large market sell order is enough to drive the price down by 80% to 90% within a few minutes.
06 Historical Echoes, the Shadow of the Luna Crisis
The USDe depegging event feels familiar to investors who experienced the bear market of 2022. In May of that year, the crypto empire known as Luna collapsed in just seven days.
The core of the Luna incident is an algorithmic stablecoin called UST. It promised an annual yield of up to 20%, attracting hundreds of billions of dollars in funds.
However, its stabilization mechanism completely relies on the market’s confidence in another token, LUNA. When UST decoupled due to massive sell-offs, confidence collapsed, the arbitrage mechanism failed, ultimately leading to the infinite issuance of LUNA tokens, with the price plummeting from $119 to less than $0.0001, resulting in about $60 billion in market value evaporating.
By juxtaposing the USDe incident with the Luna incident, we can find astonishing similarities. Both used yields far exceeding the norm as bait, attracting a large amount of capital seeking stable returns.
Both exposed the fragility of their mechanisms in extreme market environments and ultimately fell into the death spiral of "price decline, confidence collapse, liquidation sell-off, further price decline."
07 Lessons Learned: Survival Rules in the Era of Leverage
This market crash is a textbook case of cross-border systemic risk exposure in the history of crypto finance. It clearly reveals the "yield trap" of USDe circular lending in DeFi, the vulnerability of the "unified account" structure of CeFi exchanges, and how the blurred boundaries between the two create complex risk contagion paths.
For ordinary investors, this incident provides several key insights:
- The iron rule of the financial market will never change: risk and return are always proportional.
- Extreme situations will inevitably occur. Whether it was the global financial crisis of 2008 or the Luna crash of 2022, these so-called "black swan" events always come at the most unexpected times.
- Leverage is a double-edged sword; it can amplify your profits in a bull market, but it will also double your losses in a bear market.
When someone promises you "low risk, high return," they are either a scammer or you haven’t yet understood where the risk lies.
Future Outlook
In the dark forest of the crypto market, high returns are always a guise for high risks. When USDe circular loans offer an annualized return of 50%, many investors overlook the leverage risks behind it.
Leverage is like a spring; the greater the pressure, the stronger the destructive force when it rebounds. In a bull market, continuous success can dull people’s risk awareness, and when those around them are making money, few can resist the temptation.
But the market will always remind all participants at some point, in the most brutal way: there is no free lunch in the financial market.
