October 11, 2025, marked a devastating day for cryptocurrency investors globally as Bitcoin’s value nosedived from a peak of $117,000 to below $110,000 in mere hours. Ethereum faced an even harsher decline, plummeting by 16%. This turmoil sparked widespread panic, leading many altcoins to experience staggering flash crashes, some losing between 80% and 90% of their value. Even those that managed to recover still saw declines of 20% to 30%. In just a few hours, the global cryptocurrency market suffered a loss of hundreds of billions of dollars. Social media was filled with distress, with voices from across the globe uniting in a collective lament. However, the underlying causes of this market upheaval were far more intricate than they first appeared.
### The Catalyst: Trump’s Tariff Announcement
The initial trigger for this market chaos can be traced back to a statement made by U.S. President Donald Trump. On October 10, he announced via social media his intention to impose an additional 100% tariff on all imports from China, set to take effect on November 1. The language in his announcement was notably aggressive. He expressed that U.S.-China relations had deteriorated to such an extent that a meeting was unnecessary and warned of financial and trade retaliations, citing China’s monopoly on rare earth elements as a justification for this renewed trade conflict. This announcement unleashed turbulence across global markets. The Nasdaq index dropped by 3.56%, marking a significant single-day decline, while the U.S. dollar index fell by 0.57%, crude oil prices dropped by 4%, and copper prices also saw a decrease. The resulting panic selling gripped capital markets worldwide.
### The Fallout: USDe’s Catastrophe
In this massive liquidation wave, USDe, a popular stablecoin, became one of the most significant casualties. Its depegging, coupled with a highly leveraged revolving loan system surrounding it, collapsed in just a few hours. A liquidity crisis ensued, resulting in many investors using USDe for revolving loans being liquidated, which led to its price decoupling across various platforms. The situation worsened as numerous market makers utilized USDe as collateral for their contracts. When USDe’s value nearly halved in such a brief period, it effectively doubled the leverage for these market makers, leading to substantial losses even for seemingly safe long positions with 1x leverage.
### The Mechanism Behind the Downturn
The creation of USDe, a “synthetic dollar” stablecoin launched by Ethena Labs, was intended to maintain stability through a strategy called “delta-neutral hedging.” With a current market cap of about $14 billion, it ranks as the third largest stablecoin. Unlike USDT or USDC, USDe does not have a direct dollar reserve backing. Instead, it holds Ethereum while shorting an equivalent amount of Ethereum perpetual contracts, aiming to offset volatility. The appeal of investing in USDe lies in its attractive yields. Staking USDe can yield annualized returns of about 12% to 15%, driven by the funding rates of perpetual contracts. Ethena has also collaborated with various lending protocols to enhance rewards for USDe deposits. However, the real driver behind the yield surge was revolving lending, where investors repeatedly collateralized USDe, borrowed stablecoins, and redeemed USDe, effectively multiplying their principal and achieving annualized returns of 40% to 50%.
### USDe’s Instability Triggered by Market Panic
The panic triggered by Trump’s tariff announcement sent the crypto market into a state of risk aversion. Ethereum’s sharp fall directly destabilized USDe. The actual catalyst for USDe’s devaluation was the liquidation of a significant institutional investor on the Binance platform. Dovey, a crypto investor and co-founder of Primitive Ventures, speculated that a large institution employing a cross-margin model using USDe was liquidated during the market’s violent fluctuations, causing a rapid sell-off of USDe to repay debts and leading its price on Binance to drop to $0.60.
### The Downward Spiral of Liquidations
USDe’s stability hinged on two essential factors: a positive funding rate and adequate market liquidity, which allows users to redeem USDe close to $1. However, both conditions collapsed on October 11. Market panic led to a surge in short selling, quickly turning the funding rates negative, transforming the protocol from a “fee collector” to a “payer,” eroding its collateral’s value. As USDe began to decouple, market confidence rapidly eroded, prompting more sell-offs and creating a vicious cycle.
### The Liquidation Spiral Explained
In lending protocols, when a user’s collateral value falls below a specified threshold, a smart contract triggers liquidation, selling off the collateral to repay debts. As USDe’s price dropped, the health of leveraged positions through revolving loans fell below liquidation levels, initiating a spiral. Liquidated users’ USDe was sold off, increasing market pressure and further driving down prices, leading to additional liquidations—a classic “death spiral.” Many investors may have misjudged their “stablecoin investment” as a conservative strategy, unaware that their revolving loans had significantly heightened their risk exposure. Even cautious investors faced liquidation amidst the volatility.
### The Impact on Market Makers
Market makers play a vital role in facilitating trades and ensuring liquidity in the market. Many of these entities also utilized USDe as collateral on exchanges. As USDe’s value dropped swiftly, the margins of market makers were severely affected, resulting in forced liquidations. Reports indicate that the crypto market crash led to liquidations totaling tens of billions of dollars. Notably, a significant portion of these liquidations stemmed not only from retail investors’ speculative positions but also from the hedging strategies of institutional market makers and arbitrageurs. Although these institutions had initially devised intricate strategies to mitigate risks, the rapid decline of USDe—a perceived stable asset—rendered their risk management ineffective.
### Historical Parallels: The Echo of Luna
This situation may evoke memories for those who witnessed the bear market in 2022, particularly the swift collapse of the Luna cryptocurrency empire. Central to that incident was the algorithmic stablecoin UST, which promised returns of up to 20%. When UST lost its peg due to mass sell-offs, trust evaporated, and the failure of its arbitrage mechanism resulted in an unlimited issuance of LUNA tokens, causing its price to plummet and erasing around $60 billion in market capitalization. Comparisons between USDe and Luna reveal notable similarities: both attracted substantial capital through high yield promises and demonstrated fragility under extreme market conditions, ultimately spiraling into liquidation and systemic risk.
### Lessons from the Past
While there are distinctions—such as USDe being overcollateralized with crypto assets like Ethereum, unlike Luna’s purely algorithmic model—both incidents showcase the vulnerability of their mechanisms in crisis situations. Since Luna’s downfall, regulatory scrutiny has intensified around algorithmic stablecoins, impacting USDe’s environment. Despite this, many investors have seemingly overlooked the lessons learned, drawn once again by the siren song of high returns. The fragility of algorithmic stablecoins and the systemic risks posed by institutional players remain pressing concerns.
### A Cautionary Reminder: Understanding Market Risks
In the financial landscape, a fundamental principle holds true: risk is always proportional to return. Stablecoins like USDT and USDC offer lower annualized returns because they are backed by actual dollar reserves, signifying low risk. Conversely, USDe’s higher returns stem from the inherent risks of its hedging strategies. The revolving loans associated with USDe magnify leverage risks, which many investors fail to recognize as they engage in what they believe are stable investments.
### The Importance of Risk Management
Investors must learn to identify risks, particularly when faced with projects promising returns that seem too good to be true. If a mechanism is overly complex or lacks transparency, or if it is aggressively marketed, caution is warranted. The timeless advice of diversifying investments, avoiding excessive leverage, and being aware of market dynamics is essential. History has shown that extreme events can and will occur, often when least expected. The lessons from the past—such as the rapid loss of value experienced by Luna and the recent October panic—should serve as a stark reminder of the volatility in the cryptocurrency market.
### Conclusion: Navigating the Crypto Landscape Wisely
As philosopher George Santayana noted, “Those who cannot remember the past are condemned to repeat it.” Investors must respect the market and recognize that high returns often come with high risks. Algorithmic stablecoins and leveraged strategies should not be mistaken for safe investment vehicles. The allure of substantial returns can be deceptive, masking the inherent dangers that lie beneath. In the tumultuous world of cryptocurrencies, ensuring survival often outweighs the pursuit of profits.
