October 11, 2025, was a nightmare for cryptocurrency investors worldwide.
The price of Bitcoin plummeted from a high of $117,000 to below $110,000 within hours. The decline in Ethereum was even more severe, reaching 16%. Panic spread through the market like a virus, with numerous altcoins crashing by 80-90% almost instantly. Although there was a slight rebound later, the overall losses were generally between 20% and 30%.
In just a few hours, the global cryptocurrency market lost hundreds of billions of dollars in market capitalization.
On social media platforms, lamentations echoed in various languages, forming a universal dirge. Beneath the surface of panic, however, the true chain of events was far more complex than it appeared.
The trigger for this crash was a single statement from Trump.
On October 10, U.S. President Trump announced via social media that he planned to impose an additional 100% tariff on all imports from China starting November 1. The phrasing of the announcement was unusually stern; he wrote that U.S.-China relations had deteriorated to the point where “no meeting is necessary,” and that the United States would retaliate using financial and trade measures, justifying the new tariff war based on China's rare earth monopoly.
Following the news, global markets immediately fell out of balance. The Nasdaq plummeted by 3.56%, marking one of the largest single-day drops in recent years. The U.S. dollar index dropped by 0.57%, crude oil prices plunged by 4%, and copper prices also fell simultaneously. Global capital markets were gripped by panic selling.
In this epic market liquidation, the popular stablecoin USDe became one of the biggest casualties. Its depegging, along with the highly leveraged revolving loan system built around it, collapsed within hours.
This localized liquidity crisis quickly spread as a large number of investors who used USDe for revolving loans were liquidated, causing USDe’s price to begin depegging across multiple platforms.
More critically, many market makers also used USDe as margin for contracts. When the value of USDe nearly halved in a short period, their leverage doubled involuntarily. Even positions that initially seemed safe, such as those with one-time leverage on long trades, could not escape forced liquidation. Small-cap contracts and the price of USDe formed a double whammy, resulting in heavy losses for market makers.
How Did the Domino Effect of 'Circular Lending' Collapse?
The Temptation of 50% APY Returns
USDe, launched by Ethena Labs, is a 'synthetic dollar' stablecoin. With a market capitalization of approximately $14 billion, it has risen to become the third-largest stablecoin globally. Unlike USDT or USDC, USDe does not have equivalent dollar reserves but instead relies on a strategy known as 'Delta-neutral hedging' to maintain price stability. It holds Ethereum spot positions while shorting an equivalent amount of Ethereum perpetual contracts on derivatives exchanges, using hedging to offset volatility.
So, what attracted such massive inflows of capital? The answer is simple: high returns.
Staking USDe alone can yield annualized returns of about 12% to 15%, which come from the funding rates of perpetual contracts. Additionally, Ethena has partnered with several lending protocols to offer extra rewards for USDe deposits.
What truly skyrocketed the yields was 'circular lending.' Investors repeatedly operated within lending protocols, collateralizing USDe, borrowing other stablecoins, and then converting them back into USDe for redeposit. After several rounds of operations, the principal was amplified nearly fourfold, pushing the annualized return into the 40% to 50% range.
In the world of traditional finance, annualized returns of 10% are already rare. The 50% returns offered by USDe circular lending were almost irresistible to profit-seeking capital. As a result, funds kept pouring in, and the USDe deposit pools of lending protocols were often 'maxed out.' Whenever new capacity was released, it would be snapped up instantly.
USDe's Depegging
Trump’s tariff remarks triggered panic across global markets, sending the crypto market into 'risk-off mode.' Ethereum plummeted 16% in a short time, directly shaking the balance that USDe relied on to maintain its peg. However, what truly triggered USDe's depegging was the liquidation of a large institution on the Binance platform.
Crypto investor and co-founder of Primitive Ventures, Dovey, speculated that the real tipping point was the liquidation of a large institution on Binance using cross-margin (possibly a traditional trading firm utilizing cross-margin). This institution used USDe as cross-margin, and when the market experienced violent fluctuations, the liquidation system automatically sold off USDe to repay debts, causing its price on Binance to plummet to $0.60 at one point.
The stability of USDe originally relied on two key conditions. The first was positive funding rates, meaning that in a bull market, short sellers needed to pay fees to long positions, allowing the protocol to profit. The second was sufficient market liquidity, ensuring users could exchange USDe for approximately one U.S. dollar at any time.
However, on October 11, both conditions collapsed simultaneously. Market panic caused short selling sentiment to surge, and the funding rate of perpetual contracts quickly turned negative. The substantial short positions held by the protocol shifted from being "fee earners" to "fee payers," requiring continuous payments that directly eroded the value of collateral.
Once USDe began to depeg, market confidence rapidly crumbled. More participants joined the sell-off, driving prices further down and forming a vicious cycle.
The Liquidation Spiral of Recurring Loans
In lending protocols, when the value of a user’s collateral falls below a certain threshold, smart contracts automatically trigger liquidations, forcibly selling the user's collateral to repay their debt. As the price of USDe declined, positions using recurring loans with multiple leverage quickly breached the liquidation threshold.
The liquidation spiral thus commenced.
Smart contracts automatically sold off USDe from liquidated users on the market to repay their borrowed debts. This further increased the selling pressure on USDe, causing its price to drop even further. The drop in price triggered more liquidations of recurring loan positions, creating a classic 'death spiral.'
Many investors may not have realized until the moment of liquidation that their so-called 'stablecoin investments' were, in fact, high-leverage gambles. They thought they were merely earning interest but were unaware that the recurring loan operations had amplified their risk exposure several times over. When the price of USDe fluctuated violently, even those who considered themselves conservative investors could not escape liquidation.
Market Maker Liquidations and Market Collapse
Market makers are the 'lubricants' of the market, responsible for placing orders, matching trades, and providing liquidity for various crypto assets. Many market makers also use USDe as margin in exchanges. When the value of USDe plummeted in a short period, the value of these market makers’ margins shrank significantly, leading to forced liquidation of their positions on exchanges.
According to statistics, this major collapse in the crypto market resulted in hundreds of billions of dollars in liquidations. Notably, a significant portion of these hundreds of billions did not stem solely from retail investors' one-way speculative positions but also included substantial hedging positions held by institutional market makers and arbitrageurs. In the case of USDe, these professional institutions originally employed sophisticated hedging strategies to mitigate risks. However, when USDe, regarded as a "stable" margin asset, suddenly plummeted, all risk management models failed.
On derivative trading platforms like Hyperliquid, numerous users were liquidated. Holders of the platform's HLP (Liquidity Provider Vault) saw their earnings surge by 40% overnight, with profits skyrocketing from $80 million to $120 million. This figure indirectly highlights the massive scale of liquidations.
When market makers collectively faced liquidation, the consequences were catastrophic. Market liquidity evaporated instantly, and bid-ask spreads widened dramatically. For small-cap altcoins with already insufficient liquidity, this meant that prices accelerated their collapse due to the lack of liquidity on top of widespread declines. The entire market plunged into panic selling, and what began as a crisis triggered by a single stablecoin eventually escalated into a systemic collapse across the entire market ecosystem.
Echoes of History: The Shadow of Luna
This scene felt eerily familiar to investors who experienced the 2022 bear market. That May, an empire known as Luna collapsed within just seven days.
At the heart of the Luna incident was an algorithmic stablecoin called UST, which promised annualized returns as high as 20%, attracting tens of billions of dollars. However, its stability mechanism relied entirely on market confidence in another token, LUNA. When UST lost its peg due to massive sell-offs, confidence crumbled, arbitrage mechanisms failed, and LUNA tokens were minted uncontrollably, crashing from $119 to less than $0.0001. Approximately $60 billion in market value vanished.
Placing the USDe incident alongside the Luna incident reveals striking similarities. Both lured substantial funds seeking stable returns with yields far exceeding normal levels. Both exposed the fragility of their mechanisms under extreme market conditions and ultimately spiraled into a "price decline, loss of confidence, liquidation sell-offs, further price drop" death spiral.
Both incidents started as crises involving a single asset and evolved into systemic risks affecting the entire market.
Of course, there are some differences between the two. Luna was a purely algorithmic stablecoin, with no external asset collateral. In contrast, USDe is over-collateralized by crypto assets such as Ethereum. This gave USDe greater resilience than Luna during the crisis, explaining why it did not completely collapse to zero like Luna.
Furthermore, following the Luna incident, global regulators raised red flags against algorithmic stablecoins. Consequently, USDe has operated under a stricter regulatory environment since its inception.
However, the lessons of history do not seem to have been remembered by everyone. After the collapse of Luna, many vowed 'never to touch algorithmic stablecoins again.' But just three years later, faced with annualized returns of up to 50% from USDe circular lending, people have once again forgotten about the risks.
More alarmingly, this incident has exposed not only the fragility of algorithmic stablecoins but also the systemic risks posed by institutional investors and exchanges. From the Luna debacle to the FTX collapse, from the chain liquidations of small and medium-sized exchanges to the crisis in the SOL ecosystem, this path was already traversed in 2022. Yet, three years later, large institutions using cross-margin mechanisms continue to use high-risk assets like USDe as collateral, ultimately triggering a domino effect amid market volatility.
Philosopher George Santayana once said: 'Those who cannot remember the past are condemned to repeat it.'
Respect the Market
There is an unshakable iron law in financial markets: risk and return are always directly proportional.
The reason why USDT or USDC can only offer relatively low annualized returns is that they are backed by real U.S. dollar reserves, posing minimal risk. USDe can offer a 12% return because it assumes the potential risks of a Delta-neutral hedging strategy under extreme conditions. And the reason USDe circular lending can provide 50% returns is that it stacks four times the leverage risk on top of the base return.
When someone promises you 'low risk, high return,' either they are lying, or you have yet to understand where the risk lies. The danger of circular lending lies in the hidden nature of its leverage. Many investors fail to realize that their repeated collateralized borrowing operations are, in fact, a form of highly leveraged speculation. Leverage is a double-edged sword—it can amplify your gains during a bull market, but it will inevitably multiply your losses during a bear market.
History has repeatedly shown that extreme scenarios will inevitably occur. Whether it was the global financial crisis of 2008, the market crash in March 2020, or the collapse of Luna in 2022, these so-called 'black swan' events always arrive when least expected. The fatal flaw of algorithmic stablecoins and highly leveraged strategies is that their design essentially bets against extreme scenarios happening. This is a gamble destined to fail.
Why, despite knowing the risks, do so many people still rush headlong into such ventures? Human greed,侥幸 (luck-seeking), and herd mentality may explain part of it. In a bull market, successive successes can numb one’s sense of risk. When everyone around you is making money, few can resist the temptation. But the market will always remind you, in the cruelest way possible, that there is no such thing as a free lunch.
For ordinary investors, how can one survive in this turbulent ocean?
The first step is to learn how to identify risks. When a project promises 'stable' returns exceeding 10%, when its mechanisms are too complex to explain in a single sentence to a layperson, when its primary purpose is to generate profits rather than serve practical applications, when it lacks transparent and verifiable fiat currency reserves, or when it is aggressively promoted on social media, alarm bells should ring.
The principles of risk management are simple yet timeless. Do not put all your eggs in one basket. Avoid using leverage, especially covert high-leverage strategies like revolving loans. Never assume you can exit before a crash—when Luna collapsed, 99% of participants were unable to escape.
The market is far smarter than any individual. Extreme scenarios will inevitably occur. When everyone is chasing high returns, it often signals the peak of risk. Remember the lesson of Luna: a $60 billion market cap vanished within seven days, wiping out the savings of hundreds of thousands. Recall the panic on October 11, when $280 billion evaporated in just hours, leaving countless individuals facing liquidation. Next time, such a story could happen to you.
Buffett once said, 'Only when the tide goes out do you discover who's been swimming naked.'
In a bull market, everyone appears to be an investment genius, and 50% returns seem easily attainable. However, extreme conditions reveal that many have unknowingly stood on the edge of a cliff. Algorithmic stablecoins and high-leverage strategies are not 'stablecoin wealth management tools' but highly speculative instruments. A 50% return is not a 'free lunch' but bait dangling at the edge of a precipice.
In financial markets, survival always outweighs profit-making.
