From Luna to USDe, why do algorithmic stablecoins repeat the "death spiral"?

The lure of high yields from algorithmic stablecoins hides enormous risks. This article will analyze the similarities between the USDe crash event and the Luna incident, exploring systemic risks in the market and the vigilance that investors should have. (Summary: USDe decoupled to a low of $0.65 early in the morning! The chain liquidation exposed the fragility of synthetic stablecoins) (Background: The dual oligopoly era of USDT and USDC is beginning to fracture: the landscape of stablecoins is being reshaped) October 11, 2025, this day was a nightmare for global crypto investors. The price of Bitcoin plummeted from a high of $117,000, dropping below $110,000 within hours. Ethereum's decline was even more severe, reaching 16%. Panic spread through the market like a virus, with a large number of alts crashing by 80-90% in an instant, and even though there was a slight rebound afterwards, they generally dropped by 20% to 30%. In just a few hours, the market capitalization of the global crypto market evaporated by hundreds of billions of dollars. On social media, cries of despair echoed as languages from around the world merged into a single mournful song. But beneath the surface of panic, the true transmission chain was far more complex than it seemed. The starting point of this crash was a statement from Trump. On October 10, U.S. President Trump announced through his social media that starting November 1, an additional 100% tariff would be imposed on all imported goods from China. The wording of this news was unusually tough; he wrote that U.S.-China relations had deteriorated to the point of “no need for a meeting,” and that the U.S. would retaliate through financial and trade means, justifying this new tariff war with China's monopoly on rare earths. After the news broke, the global market was instantly thrown out of balance. The Nasdaq plummeted 3.56%, marking one of the rarest single-day declines in recent years. The dollar index fell 0.57%, crude oil slumped 4%, and copper prices also dropped. The global capital market plunged into a panic sell-off. In this epic liquidation, the popular stablecoin USDe became one of the biggest victims. Its decoupling, along with the high-leverage circular lending system built around it, collapsed in succession within hours. This localized liquidity crisis quickly spread, with many investors using USDe for circular lending getting liquidated, and the price of USDe began to decouple across various platforms. Worse still, many market makers also used USDe as collateral for contracts. When the value of USDe approached a 50% slump in a short time, their leveraged positions doubled passively; even the seemingly safe one-time leverage long positions could not escape the fate of liquidation. The prices of small token contracts and USDe formed a double kill, causing heavy losses for market makers. How did the domino effect of circular lending fall? The lure of 50% APY returns. USDe, launched by Ethena Labs, is a “synthetic dollar” stablecoin. With a market capitalization of about $14 billion, it has risen to become the third-largest stablecoin globally. Unlike USDT or USDC, USDe does not have an equivalent dollar reserve but relies on a strategy called “Delta Neutral Hedging” to maintain price stability. It holds Ethereum spot while shorting equivalent Ethereum perpetual contracts on derivatives exchanges to hedge against fluctuations. So, what attracted capital to flock in? The answer is simple: high returns. Staking USDe itself can yield about 12% to 15% annualized returns, coming from the funding rate of perpetual contracts. In addition, Ethena collaborates with several lending protocols to provide additional rewards for USDe deposits. What truly skyrocketed the yields was “circular lending.” Investors repeatedly operated within lending protocols, staking USDe, borrowing other stablecoins, and then exchanging them back into USDe for re-deposit. After several rounds of operations, the principal was magnified to nearly four times, and annualized returns rose to the range of 40% to 50%. In the world of traditional finance, an annualized return of 10% is already rare. Yet, the 50% returns offered by USDe circular lending were almost irresistible to profit-seeking capital. Thus, funds kept pouring in, and the USDe deposit pool in the lending protocols was often in a “full” state. Once new quotas were released, they would be snatched up in an instant. The decoupling of USDe Trump's tariff comments triggered panic in the global market, and the crypto market also entered a “hedging mode.” Ethereum plummeted 16% in a short time, directly shaking the balance on which USDe relied. But what truly ignited USDe's decoupling was the liquidation of a large institution on the Binance platform. Crypto investor and co-founder of Primitive Ventures, Dovey, speculated that the real trigger point was a large institution using a cross-margin model on the Binance platform (possibly a traditional trading company employing cross-margin) getting liquidated. This institution used USDe as cross-margin, and when the market fluctuated violently, the liquidation system automatically sold USDe to repay debts, causing its price on Binance to plummet to $0.6. USDe's stability originally relied on two key conditions. One was a positive funding rate, meaning that in a bull run, short sellers need to pay fees to long positions, allowing the protocol to profit. The second was sufficient market liquidity to ensure that users could exchange USDe at a price close to $1 at any time. But on October 11, both of these conditions collapsed simultaneously. Market panic led to a sharp rise in short selling sentiment, and the funding rates for perpetual contracts quickly turned negative. The large short positions held by the protocol switched from being “the charging party” to “the paying party,” needing to continuously pay fees, which directly eroded the value of collateral. Once USDe began to decouple, market confidence rapidly disintegrated. More people joined the ranks of selling, prices continued to dip, and a vicious cycle was completely formed. The liquidation spiral of circular lending In lending protocols, when the value of a user's collateral falls to a certain level, the smart contract automatically triggers liquidation, forcing the sale of the user's collateral to repay their debts. When the price of USDe drops, those positions that added multiple leverage through circular lending quickly fell below the liquidation line. The liquidation spiral was thus initiated. Smart contracts automatically sold the USDe of the liquidated users on the market to repay their borrowed debts. This further increased the selling pressure on USDe, leading to further declines in its price. The price decline triggered more liquidations of circular lending positions. This is a typical “death spiral.” Many investors may only realize at the moment of liquidation that their so-called “stablecoin investment” was actually a high-leverage gamble. They thought they were merely earning interest, but were unaware that the operations of circular lending had amplified their risk exposure several times. When the price of USDe fluctuated violently, even those who considered themselves conservative investors could hardly escape the fate of liquidation. Market maker liquidations and market crashes Market makers are the “lubricants” of the market; they are responsible for placing orders, matching, and providing liquidity for various crypto assets. Many market makers also use USDe as collateral on exchanges. When the value of USDe plummeted in a short time, the value of these market makers' collateral also significantly shrank, leading to their positions being forcibly liquidated on exchanges. According to statistics, this crypto market crash led to a liquidation scale of hundreds of billions of dollars. Notably, most of these hundreds of billions did not come solely from retail investors' unilateral speculative positions; there were also substantial hedging positions from institutional market makers and arbitrageurs.