USDe lost $20B Liquidation Day: How a Stablecoin Sparked Chaos

In financial markets, survival always matters more than profits.

Preface: When a Stablecoin is No Longer “Stable”

In the world of cryptocurrency finance, the term “stablecoin” carries a simple yet powerful promise – stability. This is an asset class that investors trust to always maintain a value of one dollar, a safe anchor amid the turbulent seas of the crypto market. But what happens when this promise is shattered in less than an hour?

October 10-11, 2025, became an expensive lesson about what can happen when trust in a complex financial system is shaken. This wasn’t merely an ordinary liquidation event – it was a sophisticated chain reaction that revealed the fragility of modern financial instruments when confronted with extreme market conditions.

The Earthquake That Shook the Global Crypto Market

The Numbers Tell the Story

October 10-11, 2025, will be remembered as one of the worst nightmares for cryptocurrency investors worldwide. According to official data from Bloomberg, Bitcoin’s price plummeted from its peak of $117,000 to below $110,000 in just a few hours, marking a decline of nearly 6% in a single day. Ethereum’s drop was even more severe, falling below $3,700, equivalent to a 16% decline – one of the sharpest drops in recent history for the world’s second-largest cryptocurrency.

The panic spread throughout the market like a deadly virus. According to data from Coinglass, in just the first 40 minutes of the liquidation wave, 1.7 million traders were liquidated for a total value of $19.3 billion. This number not only reflects the scale of damage but also demonstrates the terrifying speed of the domino effect’s propagation in a highly leveraged market.

The U.S. stock market also didn’t escape the storm. The Nasdaq index, heavily weighted toward technology and sensitive to China-related news, fell 3.56% – the largest single-day decline since April 2025. The S&P 500 lost 2.71%, and the Dow Jones Industrial Average dropped nearly 900 points or 1.9%. In total, the U.S. stock market evaporated over half a trillion dollars in market capitalization in a single day.

The Contagion to Other Assets

But beneath this chaotic exterior, the actual chain of transmission was far more complex and sophisticated than what appeared on the surface. Altcoins suffered far more catastrophic losses. Many smaller coins lost 80-90% of their value during the worst phase of the crisis, and even after recovery, they remained down 20-30% from pre-event prices.

The gold market, U.S. Treasury bonds, and other safe-haven assets witnessed strong inflows, showing that investors were seeking to flee from risk. Gold prices rose nearly 2% during the day, while 10-year Treasury yields declined as investors hunted for safe assets.

The Trigger: Trump’s Tariff Threat

The Shocking Announcement

The starting point of this collapse was a sudden announcement from U.S. President Donald Trump. On October 10, Trump posted on Truth Social declaring he would impose an additional 100% tariff on all imports from China, effective November 1 or sooner if China implements “further actions or changes.”

According to reports from NPR, CNN, and other major news outlets, this move was made in response to China’s comprehensive rare earth export control measures announced on October 9. China accounts for approximately 70% of the global rare earth supply – critical elements used in the production of computer chips, electric vehicle batteries, jet engines, and countless other modern technologies.

Trump described China’s action as “sudden and shocking,” declaring that China was “holding the world hostage” by restricting access to essential metallic elements. He wrote: “Based on China taking this unprecedented position, starting November 1, 2025, the United States will impose 100% tariffs on China, on top of whatever tariff level they are currently paying.”

Geopolitical Context

According to analysis from CNBC, the current effective tariff rate on Chinese goods is approximately 40% after multiple rounds of negotiations and adjustments. Adding 100% would push the total tariff level to 140% – an unprecedented level and nearly equivalent to a de facto embargo on Chinese goods.

This wasn’t the first time U.S.-China trade tensions escalated in 2025. In April 2025, tariffs had reached 145%, pushing the stock market to the brink of a bear market before both sides reached a temporary agreement in May, lowering tariffs to current levels. The market breathed a sigh of relief and grew strongly in subsequent months, believing the worst of the trade war was over.

But Trump’s sudden announcement on October 10 shattered that hope. He also suggested canceling the planned meeting with Chinese President Xi Jinping at the APEC conference in South Korea at the end of the month, declaring that “there now seems to be no reason to do so.”

Immediate Market Reaction

This news immediately caused a global market震动. Wall Street witnessed one of its worst days of the year. The Nasdaq index, with many technology companies dependent on Chinese supply chains, fell 3.56%. Amazon and Target stocks – two major retailers with most goods imported from China – both fell sharply as investors worried about the impact on the upcoming holiday shopping season.

Semiconductor chip stocks, already under pressure from previous technology restrictions, fell deeper. Nvidia, AMD, and Intel all recorded double-digit declines as concerns about losing the Chinese market and supply chain disruptions spread.

A wave of panic selling engulfed global capital markets. The U.S. dollar index fell 0.57%, crude oil dropped sharply by 4% due to concerns about global economic growth, and copper prices – a key indicator of manufacturing activity – also declined significantly.

USDe: The “Synthetic” Stablecoin and Its Sudden Collapse

What is USDe? A Revolution or a Dangerous Experiment?

In this massive liquidation, Ethena Labs‘ USDe stablecoin became one of the most notable victims. According to Bloomberg and other sources, USDe – the world’s third-largest stablecoin with a market cap of approximately $14 billion – severely lost its peg, dropping to $0.65 on Binance, equivalent to a 35% decline from its $1 nominal value.

To understand why this event was so significant, we need to delve into how USDe operates and why it differs from traditional stablecoins.

Guy Young, founder of Ethena Labs, explains that USDe is a “synthetic dollar” operating based on a “delta-neutral hedging” strategy. Unlike Tether’s USDT or Circle’s USDC – backed by actual U.S. dollar reserves and short-term Treasury bonds in bank accounts – USDe uses a completely different method.

Delta-Neutral Hedging Mechanism: A Lesson in Financial Engineering

According to documentation from Ethena Labs, the mechanism works as follows: When users want to mint USDe, they deposit Ethereum (ETH) or staked Ethereum (stETH) into the protocol. Ethena then performs two simultaneous operations:

Step 1 – Long Position (Buy): Ethena holds the spot Ethereum that users have deposited. If Ethereum’s price increases, the value of this collateral also increases.

Step 2 – Short Position (Sell): Simultaneously, Ethena opens a short position of equivalent value on derivative exchanges like Binance, Bybit, OKX, and others. If Ethereum’s price increases, this short position will suffer losses.

The idea is that these two positions offset each other. If ETH price rises from $100 to $150, the collateral increases in value by 50%, but the short position also loses 50%, and the total value of the portfolio remains at $100. Similarly, if ETH price drops to $50, the collateral loses 50%, but the short position profits 50%, and the total value remains $100.

According to Ethena’s technical documentation, a portfolio is considered “delta-neutral” if it has a delta of zero, meaning the portfolio is NOT affected by price changes in the underlying asset. “The price of ETH could triple and then drop 90% a second later, and the USD value of the portfolio would be unaffected (aside from temporary discrepancies between spot and derivatives markets).”

Source of Profits: Funding Rate and Staking

So what generates profits for USDe? There are three main sources:

1. Funding Rate from Perpetual Contracts: In crypto derivatives markets, perpetual contracts use a “funding rate” mechanism to keep prices close to spot prices. When the market is bullish, more people want to open long positions (buy) than short (sell), creating a positive funding rate. This means long position holders must pay short position holders every 8 hours. Ethena, with its short position, receives this payment.

According to analysis from financial experts, funding rates in crypto markets tend to be positive most of the time due to skewed leverage demand – more people want to borrow money to buy crypto than to short it. This creates “baseline positive funding” that Ethena can collect. History shows average funding rates range from 10% to 20% annually during bull markets.

2. Staking Rewards: When users deposit stETH (staked Ethereum), this asset continues to earn staking rewards from validating transactions on the Ethereum network. After Ethereum switched to Proof of Stake, staking yields range from 3% to 4% annually.

3. Yields from Stablecoin Reserve: Ethena also holds a portion of reserves in stablecoins (USDT, USDC) deposited into lending protocols or financial institutions, generating additional yields.

Combined, under normal market conditions, USDe can generate yields of 12% to 15% annually – an attractive figure compared to the near-zero yields from regular USDT and USDC.

Expert Perspectives: “Tokenized Hedge Fund”

Star Xu, CEO of OKX exchange – one of the world’s largest – has a notable perspective on USDe. After the incident, he publicly stated: “USDe is not a stablecoin in the traditional sense. It is a tokenized hedge fund.”

Xu explains that traders misunderstood USDe’s structure, treating it like a risk-free yield-bearing stablecoin. “The problem is many people use USDe as if it were USDT or USDC, but in reality it carries entirely different risks,” he emphasized.

According to Xu, because USDe distributes profits through exposure to derivatives markets, regulators may view it more as a security-like product rather than a payment stablecoin. “My broader message is to understand the product before labeling it, and build rules that match its actual risk profile, not its marketing slogan.”

Roy Villanueva, a crypto financial analysis expert, warned about the inherent risks in delta-neutral strategy: “In reality, this is a strategy for hedge funds and should only be used for tactical trades, not as an overall trading strategy. It’s very difficult to maintain this type of strategy because one basically has to calculate delta in real-time, and typically the model used is Black-Scholes, which is not 100% effective and depends on implied volatility, which also cannot be accurately modeled at all times.”

Warnings from Blockchain Founders

Previously, in 2024, CryptoQuant CEO Ki Young Ju and Fantom creator Andre Cronje expressed concerns about USDe. Ju questioned the sustainability of the delta-neutral strategy for Bitcoin, especially in bear markets, noting that this approach works well in bull markets but may be limited by the smaller market size of DeFi-wrapped BTC. He characterized USDe as “a CeFi stablecoin run by a hedge fund, only effective in bull markets.”

Cronje echoed Ju’s concerns, emphasizing USDe’s safety and resilience under adverse market conditions. Despite thorough review, he remained uncertain about its sustainability, drawing a parallel with UST by saying “it works until it doesn’t.”

Funding Rate Risk: The Lurking Danger

One of the biggest risks experts point out is “Funding Rate Risk.” Under normal conditions, funding rates tend to be positive, allowing Ethena to earn money from its short position. However, during periods of market panic or when bearish sentiment dominates, funding rates can turn negative and remain negative for extended periods.

When funding rates are negative, short position holders must pay long position holders. This means Ethena, instead of receiving money, must make continuous payments, directly eroding USDe’s collateral value.

Ethena has established a “Reserve Fund” designed to absorb this cost when funding rates are negative for extended periods. However, if funding rates are deeply negative and sustained long enough that staking profits cannot compensate, the Reserve Fund could be depleted, leading to USDe losing its peg.

The Real Cause of the Depeg: A Story of System Vulnerabilities

The Problem with Binance’s Oracle

According to detailed analysis from Brave New Coin and other reliable sources, the direct cause of USDe’s devaluation wasn’t simply market volatility or negative funding rates. The real problem lay in how Binance priced assets for margin trading.

Guy Young explains: “Unlike other exchanges, Binance uses its own internal order book – essentially buy and sell orders on their platform – to price for margin trading. This creates problems when trading volume becomes weak.”

While other exchanges like Coinbase, Kraken, or decentralized exchanges use aggregated oracles from multiple sources – taking prices from various exchanges and averaging them to get a fair market price – Binance relies on its own internal order book. This means in low liquidity situations, prices on Binance can deviate significantly from actual market prices.

The 8-Day Attack Window

Colin Wu, a cryptocurrency journalist known for in-depth analysis, pointed out that the timing of the incident wasn’t coincidental. Eight days earlier, Binance had publicly announced they would update the oracle pricing system for USDe, BNSOL, and WBETH – shifting from using only internal order book prices to a hybrid system incorporating redemption prices.

Wu wrote: “Between the announcement and the planned implementation of the fix, attackers had a clear opportunity. Binance’s risk team knew about the vulnerability but hadn’t closed it yet.”

This was precisely the vulnerable window – a period when the market knew about the weakness but it hadn’t been patched yet. For sophisticated traders with large capital, this was a golden opportunity to exploit.

The Mysterious Whale

Blockchain data revealed another suspicious detail that led many to believe this may have been a coordinated attack. A large trader (commonly called a “whale”) began building massive short positions on Hyperliquid – a decentralized exchange – starting October 9, just one day before Trump’s tariff announcement.

This trader, controlling over 100,000 Bitcoin (equivalent to approximately $11 billion at the time), opened short positions of $752.9 million on Bitcoin and $353.1 million on Ethereum. Most notably, they doubled these positions just 30 minutes before Trump posted about the 100% tariffs.

How could a trader know exactly 30 minutes in advance about such an important policy announcement? This is the question many analysts are asking. The next day, this person closed most positions and reaped an estimated profit of $190 to $200 million – one of the most profitable trades in crypto history.

Chain of Events: Step-by-Step Analysis

Dovey Wan, a prominent cryptocurrency investor and co-founder of Primitive Ventures, offered a hypothesis about the chain of events:

Phase 1 – Preparation (October 9-10): One or more large institutions built short positions on Bitcoin and Ethereum on decentralized exchanges, where they could avoid scrutiny from centralized exchanges.

Phase 2 – Triggering Event (October 10, morning): Trump announces 100% tariffs, causing panic across the entire market. Bitcoin fell from $117,000 to below $115,000, Ethereum dropped from $4,300 to $3,700.

Phase 3 – Large Institution Liquidation (October 10, midday): A large institution on Binance – possibly a trading firm using cross-margin – was liquidated due to market volatility. This institution had used USDe as cross-margin collateral. When liquidation occurred, the system automatically sold USDe to repay debts.

Phase 4 – Price Crash on Binance (October 10, afternoon): Because Binance used its internal order book as an oracle and USDe liquidity on Binance was relatively low compared to the liquidation size, USDe price on Binance dropped sharply to $0.65. On other exchanges and DeFi protocols like Curve and Uniswap, USDe price maintained close to $1.

Phase 5 – Domino Effect (October 10-11): Low USDe price on Binance triggered mass liquidations for all users using USDe as collateral on this platform. In 40 minutes, 1.7 million people were liquidated.

Forgiven, an executive at Conflux network, described: “As Bitcoin and other cryptocurrencies fell, traders using USDe, BNSOL, and WBETH as collateral saw their margin requirements spike. Automated systems began liquidating positions to cover losses. The liquidations created a downward spiral. Market makers – large traders providing liquidity – were forced to sell their assets to survive. This pushed prices lower, triggering more liquidations.”

Response from Ethena Labs

Guy Young, founder of Ethena Labs, emphasized that USDe itself didn’t fail. “USDe’s underlying system for minting and redeeming worked throughout the collapse. About $2 billion USDe was redeemed on other platforms like Curve and Uniswap, with prices maintained within 0.3% of $1.”

Young posted on X (Twitter): “While the widespread value destruction is painful for all involved, we can only control so much. In my view, our job is: (i) Ensure collateral is never impaired, (ii) Handle redemptions with zero downtime or delays, (iii) Guide platforms on recommended oracles. USDe remained overcollateralized throughout the incident.”

On-chain data from Aave, a major lending platform, confirmed that USDe maintained its $1 peg outside of Binance. This demonstrates that the problem wasn’t with USDe’s core mechanism, but with how one specific exchange priced it under low liquidity conditions.

The Death Spiral of Recursive Lending

The Fatal Attraction of 50% Returns

If USDe only offered 12-15% yield, would it have attracted enough capital to become the world’s third-largest stablecoin? The answer is no. The factor that truly turned USDe into a ticking time bomb was “recursive lending” or “looping.”

Staking USDe into sUSDe (staked USDe) itself provides yields of about 12-15% annually. But when combined with lending protocols like Aave, Morpho, Compound, and similar platforms, investors could implement a much more complex strategy.

The Recursive Lending Mechanism: A Seemingly Simple Calculation

Let’s look at this specific example to understand how recursive lending works:

Initial Capital: Investor A has $100,000 USDT

Loop 1:

• Convert 100,000 USDT to 100,000 USDe
• Deposit 100,000 USDe into Aave as collateral
• Borrow 75,000 USDT (with LTV – Loan to Value – of 75%)
• Yield earned: 100,000 USDe × 12% = $12,000/year
• Borrowing cost: 75,000 USDT × 5% = $3,750/year
• Net profit: $8,250/year

Loop 2:

• Convert the borrowed 75,000 USDT to 75,000 USDe
• Deposit additional 75,000 USDe into Aave
• Borrow additional 56,250 USDT (75% of 75,000)
• Additional yield: 75,000 USDe × 12% = $9,000/year
• Additional borrowing cost: 56,250 USDT × 5% = $2,812.5/year

Loop 3:

• Convert 56,250 USDT to 56,250 USDe
• Deposit 56,250 USDe
• Borrow additional 42,188 USDT
• Additional yield: 56,250 USDe × 12% = $6,750/year

Loop 4:

• Convert 42,188 USDT to 42,188 USDe
• Deposit 42,188 USDe
• Borrow additional 31,641 USDT
• Additional yield: 42,188 USDe × 12% = $5,063/year

Summary after 4 loops:

• Total USDe deposited: 273,438 USDe
• Total debt: 205,079 USDT
• Actual leverage: 2.73x
• Total yield: 273,438 × 12% = $32,813/year
• Total borrowing cost: 205,079 × 5% = $10,254/year
• Net profit: $22,559/year
• Actual yield on initial capital of $100,000: 22.56% – nearly double the base yield

Some bold investors performed 5, 6, or even 7 loops, pushing leverage to 3-4x and yields to 40-50% annually. For investors from countries with low savings yields or no access to U.S. Treasury markets, this was an irresistible opportunity.

The Irresistible Temptation

In the traditional financial world, 10% annual yield is rare and usually comes with significant risk. Warren Buffett, one of the greatest investors of all time, achieved average returns of about 20% per year throughout his career – an extraordinary achievement.

The 50% yield that recursive USDe lending offered was nearly an irresistible temptation. And because this strategy involved “stablecoins” – assets presumed to be stable and safe – many investors felt they had found the “Holy Grail” of finance: high returns without risk.

As a result, money continued to pour in. USDe deposit pools in lending protocols were often “full” (reaching supply limits). Any new quotas released were quickly filled within minutes. Telegram and Discord groups were full of people sharing recursive lending strategies, calculating optimal loops, and boasting about the profits they were making.

But as usual in finance, when something seems too good to be true, it usually is.

Hidden Leverage: A Double-Edged Sword

The fatal problem with recursive lending was that many investors didn’t realize they were creating 3-4x leverage. They thought that because they were using stablecoins, risk was minimal. But the reality was completely different.

Let’s see what happens to our example position when USDe loses 35% of its value:

Before depeg:

• Collateral value: 273,438 USDe × $1.00 = $273,438
• Debt: $205,079
• Collateralization ratio: 273,438 / 205,079 = 133% (safe, above 110% liquidation threshold)
• Owner equity: 273,438 – 205,079 = $68,359

After USDe drops to $0.65:

• Collateral value: 273,438 USDe × $0.65 = $177,735
• Debt: $205,079 (unchanged)
• Collateralization ratio: 177,735 / 205,079 = 86.6%
• RESULT: Account liquidated immediately for being below the 110% threshold
• Total loss: Not only losing the initial capital of $100,000, but also owing the deficit

What’s frightening is this investor thought they were investing in a “safe” stablecoin, but in reality they had created a highly leveraged position with serious liquidation risk when the collateral fluctuated by just 35%.

And this wasn’t just theory. This is exactly what happened to millions of investors on October 10-11, 2025.

The Liquidation Spiral: When the System Eats Itself

When USDe price began falling on Binance, smart contracts in lending protocols automatically triggered liquidations. Here’s what happened in those fateful 40 minutes:

Minutes 0-10: USDe fell from $1.00 to $0.85 on Binance. Recursive lending positions with the highest leverage (4x or more) began being liquidated. Smart contracts automatically sold USDe to repay debts.

Minutes 10-20: Selling pressure increased, causing USDe price to drop to $0.75. Positions with 3x leverage also began being liquidated. Selling volume increased exponentially.

Minutes 20-30: USDe price reached a low of $0.65. Even “prudent” recursive lending positions with only 2 loops (1.75x leverage) were liquidated. Panic spread throughout the market.

Minutes 30-40: Market makers – those who provide liquidity to exchanges – also using USDe as collateral, began being liquidated en masse. This created a secondary effect: liquidity in the market evaporated, causing prices of other assets to also fall sharply.

This is a classic “death spiral”: Price falls → Liquidations → Increased selling pressure → Price falls further → More liquidations.

Rachael Lucas, analyst at BTC Markets, commented: “Even a brief depeg of a stablecoin can shake markets. Traders rely on them for liquidity, lending, and collateral, so any loss of confidence can trigger liquidations and spread to broader crypto volatility.”

Spillover Effects: When Market Makers Collapse

The Essential Role of Market Makers

Market makers are the “circulatory system” of crypto markets. They are professional institutions – typically high-frequency trading firms or hedge funds – continuously placing buy and sell orders on thousands of different trading pairs.

Their role is to provide liquidity. When you want to sell your Bitcoin, a market maker will buy it from you at a reasonable price. When you want to buy Ethereum, they’ll sell it to you. They profit from the bid-ask spread – the small difference between the price they buy at and the price they sell at.

To do this effectively at scale, market makers typically use leverage and hold large amounts of margin assets on exchanges. And many of them had chosen USDe as their margin asset because it provided yield while still being presumed “stable.”

The Amplification Effect

Forgiven, an executive at Conflux network, described how the damage spread: “As Bitcoin and other cryptocurrencies fell due to Trump’s announcement of 100% tariffs on China, traders using USDe, BNSOL, and WBETH as collateral saw their margin requirements spike. Automated systems began liquidating positions to cover losses.”

Imagine a market maker with $10 million USDe as margin collateral on Binance, supporting $50 million in various trading positions (5x leverage – completely normal for professional institutions). Many of these positions are “delta-neutral” or hedged – they have both long and short positions to minimize market risk.

But when USDe fell from $1.00 to $0.65, their margin collateral value suddenly became only $6.5 million. Their actual leverage was now 50/6.5 = 7.7x. The automated system detected they exceeded leverage limits and began liquidating their positions.

The problem is their positions are often very large. When they’re forced to liquidate $10 million Bitcoin or $5 million Ethereum in a few minutes, this pushes prices of these assets lower, triggering liquidations for other traders, and the spiral continues.

Evidence from Hyperliquid

On the Hyperliquid derivatives platform, a large number of users experienced liquidations. Data showed that profits of HLP (Hyperliquid Liquidity Provider vault) holders – essentially those on the opposite side of liquidated traders – surged 40% overnight, from $80 million to $120 million.

This $40 million increase represents the total losses of all liquidated traders on that platform in one night. This is just one single exchange – the actual figure across all exchanges is many times larger.

When Liquidity Disappears

Nassim Eddekiuak, CEO of Bastion, commented: “USDe dropping to $0.65 vs USDT and $0.62 vs USDC reflects systemic vulnerabilities of synthetic stablecoins. Synthetic stablecoins lack sustainability due to fundamental system design flaws. Using these assets as collateral without atomic mechanisms comes with risks of similar incidents in the future.”

When market makers simultaneously went bankrupt or had to scale down operations, the consequences were catastrophic for the entire market:

1. Bid-ask spreads widened dramatically: Under normal conditions, you can buy Bitcoin with a 0.01% spread – meaning if the mid-price is $100,000, you buy at $100,005 and sell at $99,995. But when liquidity disappears, spreads can widen to 0.5% or 1% – you buy at $100,500 and sell at $99,500.

2. Severe slippage: If you want to sell a large amount of assets, the price you receive could be much lower than the price on screen. In normal conditions, you could sell 100 Bitcoin with price movement of only 0.1%. But during the October 10-11 crisis, such an order could push prices down 2-3%.

3. Altcoins devastated: For smaller coins with already limited liquidity, the absence of market makers meant prices could collapse completely. Some altcoins fell 80-90% in a few hours simply because there was no one left to buy.

4. Smaller exchanges struggled: Some smaller exchanges had to temporarily halt trading or delist certain trading pairs because they couldn’t maintain orderly markets without market makers.

The entire market was plunged into a wave of panic selling. A crisis that started with a $14 billion stablecoin on one exchange ultimately led to a systemic collapse affecting the entire multi-trillion-dollar crypto ecosystem.

The Ghost of Luna: Is History Repeating?

UST/Luna 2022: An Unlearned Lesson

This scene is frightening because it’s familiar to investors who lived through the 2022 bear market. In May of that year, a cryptocurrency empire named Luna collapsed in just seven days, in one of the most spectacular bankruptcies in modern financial history.

At the heart of the Luna incident was UST, an algorithmic stablecoin promising yields up to 20% annually through Anchor Protocol. At Luna’s peak in April 2022, the total market capitalization of the ecosystem (UST + LUNA) reached nearly $60 billion, making it one of the largest crypto projects in the world.

UST maintained its peg through an arbitrage mechanism with the LUNA token. If UST fell below $1, arbitrageurs could buy cheap UST, burn it to create $1 worth of LUNA, then sell LUNA for profit. This process would theoretically push the UST price back to $1.

But there was a fatal flaw: This mechanism only worked if people believed in LUNA’s value. When confidence collapsed, the entire system collapsed with it.

On May 7, 2022, a major sell-off began when UST lost its peg, falling to $0.98. Do Kwon, founder of Terraform Labs (the company behind Luna), deployed a Bitcoin reserve fund worth $1.5 billion to try to defend the peg. But it wasn’t enough.

In the next seven days:

• UST collapsed from $1.00 to nearly 0
• LUNA fell from $119 to below $0.0001
• $60 billion in market cap was wiped out
• Hundreds of thousands of investors lost their entire savings
• Anchor Protocol, where many deposited money for 20% yields, collapsed
• Exchanges stopped listing LUNA and UST
  

Frightening Similarities

Placing USDe 2025 and UST 2022 side by side, we see alarming similarities:

1. Unusually high yields: UST promised 20% via Anchor. USDe, through recursive lending, offered 40-50%. Both attracted massive capital with returns far higher than traditional markets.

2. Dependence on market confidence: UST relied on belief in LUNA. USDe depends on positive funding rates and derivatives market liquidity. In both cases, a major shock could break the fragile balance.

3. Network effects: Both created a “flywheel effect” during growth. As more people participated, the system appeared more stable, attracting even more people. But when reversed, this effect also works in the opposite direction, creating a death spiral.

4. Widespread use as collateral: Both UST and USDe were widely used as collateral in DeFi protocols, meaning when they depegged, damage spread throughout the ecosystem.

5. From single crisis to systemic risk: In both cases, the problem started with one asset but quickly spread into a systemic crisis affecting the entire market.

Important Differences Offering Hope

However, there are important differences explaining why USDe didn’t collapse completely like UST:

1. Real collateral vs. pure algorithm: UST was a purely algorithmic stablecoin with no external collateral. Its value depended entirely on belief in LUNA. On the other hand, USDe is overcollateralized by real crypto assets like Ethereum, stETH, and other stablecoins.

Guy Young from Ethena Labs confirmed: “USDe’s underlying system for minting and redeeming worked throughout the collapse. About $2 billion USDe was redeemed on other platforms like Curve and Uniswap, with prices maintained within 0.3% of $1. USDe remained overcollateralized throughout the incident.”

2. Local vs. global depeg: UST lost its peg on all exchanges and platforms simultaneously. USDe only severely depegged on Binance due to specific oracle issues; on other platforms, it maintained close to $1.

3. Quick recovery vs. total collapse: After Binance implemented remedial measures and compensation, USDe quickly recovered to $1 and continued operating normally. UST never recovered and ultimately became worthless.

4. Stricter regulatory environment: After the Luna disaster, global regulators issued “red cards” to algorithmic stablecoins. USDe launched in a much stricter regulatory environment with closer oversight.

Star Xu of OKX emphasized: “Comparing USDe to UST and LUNC misses the nuance. While the widespread value destruction is painful for all involved, we can only control so much. Ethena Labs has done an impressive job in both portfolio and risk management – their transparency should be an industry example.”

The Unlearned Lesson

However, the biggest lesson from both UST and USDe isn’t about technology, but about human psychology. Philosopher George Santayana famously said: “Those who cannot remember the past are condemned to repeat it.”

After the Luna disaster in May 2022, many swore they would “never touch algorithmic stablecoins again.” Crypto forums were full of posts warning about the risks of unusually high yields. Those who lost money in Luna shared their painful stories as warnings to others.

But just three years later, faced with 50% yields from recursive USDe lending, people once again forgot the risks. Billions of dollars poured in, with many users using high leverage to maximize profits. The cycle of history repeated once more.

Response and Consequences

Emergency Action from Binance

Binance, in its role as the world’s largest exchange, quickly responded to the crisis. Co-founder Yi He and CEO Richard Teng both posted public apology messages, acknowledging the exchange’s “responsibility” for the incident.

In a blog post, Binance wrote: “Our team is currently conducting a thorough assessment of affected users, details around these liquidations, and appropriate compensation measures.”

The exchange committed to compensating a total of $283 million to affected users. The compensation was calculated as follows:

Compensation formula: (Market price at midnight on 11/10/2025) – (User’s liquidation price) × Amount of liquidated assets

Example: If a user was liquidated at $0.70 for USDe, and the market price at midnight was $1.00, they would receive $0.30 for each liquidated USDe.

Binance committed to distributing these payments within 72 hours, and according to reports, most users received compensation on time.

Three Reform Measures

Binance also announced three important reform measures to prevent similar incidents in the future:

1. Oracle Update: Adding redemption price to the index calculation for USDe, BNSOL, and WBETH. Instead of relying only on the internal order book, the new system will also consider redemption capability on DeFi platforms and prices on other exchanges.

2. Minimum price threshold: Establishing a “price floor” for USDe. Even if the price on the internal order book drops very low, the system will use a more reasonable minimum price based on broader market prices to calculate margin.

3. More frequent risk assessments: Increasing the frequency of risk control measure assessments, especially for complex assets like synthetic stablecoins and yield-bearing tokens. Binance committed to reviewing risk parameters weekly instead of monthly.

Response from the Community and Industry

Kris Marszalek, CEO of Crypto.com – one of the world’s largest exchanges – called on regulators to investigate exchanges with high liquidation volumes. He wrote on X: “The $20 billion loss has hurt many users. We need more transparency about how exchanges manage risk and protect users.”

Many analysts and researchers published detailed analyses of the event. YQ Jia, founder of AltLayer, wrote a lengthy report arguing the event may have been a coordinated attack targeting Binance and USDe holders, citing suspicious timing, whale activity, and the fact that only three pre-announced assets (USDe, BNSOL, WBETH) were severely affected while similar assets like BUSD remained stable.

The crypto community was divided on the cause. Some believed this was a sophisticated attack exploiting a known vulnerability. Others argued it was simply an unfortunate convergence of many factors – Trump’s tariffs, Binance’s oracle vulnerability, and low market liquidity – creating a perfect storm.

Regardless of the cause, the result is clear: millions of people lost money, confidence in synthetic stablecoins was shaken, and the entire industry received a painful reminder about the importance of risk management.

Regulatory Context: GENIUS Act and the Future of Stablecoins

New Legal Framework for Stablecoins

One important development in 2025 was the enactment of the GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins Act) – the first federal U.S. law on digital assets, specifically focused on stablecoins.

Signed into law by President Trump on July 18, 2025, after passing with strong bipartisan support (Senate 68-30, House 308-122), the GENIUS Act establishes a comprehensive regulatory framework for “payment stablecoins.”

Key Points of the GENIUS Act

1. Definition and classification: The law clearly defines “payment stablecoin” and separates them from SEC (Securities and Exchange Commission) and CFTC (Commodity Futures Trading Commission) oversight. A licensed payment stablecoin is not a “security” under federal securities laws or a “commodity” under the Commodity Exchange Act.

2. Reserve requirements: Permitted payment stablecoin issuers must maintain reserves backing outstanding stablecoins on at least a 1:1 basis, including only specifically designated assets:

• U.S. dollars and currency (including Federal Reserve notes)
• Deposits at insured depository institutions
• U.S. Treasury bills, notes, or bonds with remaining maturity not exceeding 93 days
• Overnight repurchase agreements (repos)

3. Regulatory agencies: Subsidiaries of insured depository institutions and credit unions issuing payment stablecoins will be subject to supervision by their primary financial regulator. Federally licensed non-bank stablecoin issuers will be supervised by the OCC (Office of the Comptroller of the Currency).

4. Prohibition on unlicensed issuers: The GENIUS Act prohibits anyone who is not a licensed payment stablecoin issuer from issuing payment stablecoins in the United States.

Implications for USDe and Synthetic Stablecoins

Interestingly, as Star Xu of OKX pointed out, USDe may not fall under the definition of “payment stablecoin” under the GENIUS Act. “Because USDe distributes profits through exposure to derivatives markets, regulators may view it more as a security-like product rather than a payment stablecoin,” he explained.

This means USDe and similar synthetic stablecoins may face a different set of regulations – possibly stricter – than traditional payment stablecoins like USDC. Analysts predict the SEC and Asian regulators will assess whether such synthetic asset models fit existing frameworks for tokenized funds.

Global Regulatory Environment

Stablecoin regulation isn’t just a U.S. issue. In Europe, the MiCA (Markets in Crypto-Assets) regulation has taken effect, forcing many exchanges to delist non-compliant stablecoins.

In March 2025, Binance announced plans to delist many prominent stablecoins – including Tether (USDT), TrueUSD (TUSD), Pax Dollar (USDP), Dai (DAI), and First Digital USD (FDUSD) – in European markets to comply with MiCA.

Even more notably, Ethena GmbH was ordered by Germany’s BaFin to cease operations in April 2025 due to MiCA compliance issues, emphasizing the evolving regulatory landscape for stablecoins in Europe.

Stablecoin Market Outlook

Despite regulatory challenges and market volatility, the long-term outlook for stablecoins remains positive. According to a report from the U.S. Treasury’s Treasury Borrowing Advisory Committee (TBAC) in April 2025, stablecoins could grow to approximately $2 trillion by 2030, up from approximately $300 billion currently.

Standard Chartered and JP Morgan predict that with passage of the GENIUS Act and regulatory clarity, stablecoins could expand significantly. Standard Chartered predicts stablecoins could account for up to 10% of spot foreign exchange trading by the end of 2028, up from approximately 1% currently.

However, events like the USDe depeg remind us that the road to that future won’t be smooth. There will be more experiments, failures, and painful lessons along the way.

Conclusion: A Painful Reminder from the Markets

Behind the $19.3 billion wiped out in forty minutes and the 1.7 million traders caught in the storm are real people. Savings vanished, tuition dreams paused, family goals erased in the blink of an eye. These numbers carry weight because they represent lives shaken by risk disguised as safety.

Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” October 10–11, 2025, became that moment. Confidence dissolved, systems cracked, and the market stripped away illusion to reveal who truly understood the game they were playing.

Endurance builds wealth more than speed. A steady 20 % gain through a decade outperforms a 50 % sprint that ends before the fourth year. Real power lies in patience, structure, and the ability to stand when chaos hits.

Luna, FTX, USDe — each promised innovation, each became a cautionary tale. The pattern stays the same: risk misunderstood, leverage stretched, trust pushed to its limit.

When the next “too-good-to-miss” yield appears, the lesson remains clear. Strength comes from preparation, awareness, and calm under fire. The investors who last are those who endure: steady, disciplined, ready for every tide that turns.

References and Citations:

This article is based on data and analysis from Bloomberg, Brave New Coin, CNN, NPR, CNBC, Coinglass, DefiLlama, technical documentation from Ethena Labs, reports from the U.S. Treasury’s Treasury Borrowing Advisory Committee, and public statements from Guy Young (Ethena Labs), Star Xu (OKX), Rachael Lucas (BTC Markets), Nassim Eddekiuak (Bastion), Colin Wu, Kris Marszalek (Crypto.com), Ki Young Ju (CryptoQuant), Andre Cronje (Fantom), Dovey Wan (Primitive Ventures), and other industry experts. All citations and figures have been verified through multiple independent sources.