The most stable leverage creates the most collapsing situation: Trump ignited the fire, why is my account footing the bill?

Although this big dump was sparked by Trump, its disastrous destructive power originates from the high-leverage environment within the crypto market's native financial system. The high-yield stablecoin USDe, the recursive “circular lending” strategy built around it, and its widespread use as Margin Collateral by market participants such as market makers have collectively created a highly concentrated and extremely fragile risk Node.

The price decoupling incident of USDe was like the first domino, triggering a chain reaction of large-scale deleveraging that spread from on-chain DeFi protocol liquidations to centralized derivatives exchanges. This article will dissect the operational principles of this mechanism in detail from the perspectives of major holders and market makers.

Part One: Powder Keg x Spark: Macro Triggers and Market Vulnerabilities

1.1 Tariff Declaration: Catalyst, Not Root Cause

The trigger for this market upheaval is: Trump announced plans to impose additional tariffs of up to 100% on all Chinese imports starting November 1, 2025. This statement quickly triggered a classic risk-averse reaction in global financial markets. This news became the catalyst for the initial sell-off in the market.

After the announcement of the tariff war, global markets fell in response. The Nasdaq index plummeted more than 3.5% in a single day, while the S&P 500 index dropped nearly 3%. Compared to traditional financial markets, the reaction of the crypto market was much more intense. The price of Bitcoin fell 15% from its intraday high; meanwhile, Altcoins experienced a catastrophic flash crash, with prices dropping 70% to 90% in a short time. The total amount of cryptocurrency contract liquidations across the network exceeded USD 20 billion.

1.2 Existing Situation: Market Problems Under Speculative Frenzy

Before the crash occurred, the market was already filled with excessive speculative sentiment. Traders generally adopted high leverage strategies, trying to “buy the dip” during every pullback to seek greater profits. At the same time, high-yield DeFi protocols represented by USDe rapidly emerged, attracting a massive amount of capital seeking returns with their exceptionally high annualized yield. This led to the formation of a systemically fragile environment within the market, built on complex, interconnected financial instruments. It can be said that the market itself has become a powder keg filled with potential leverage, just waiting for a spark to ignite it.

Part Two: Amplification Engine: Breaking Down the USDe Circular Lending Loop

2.1 The Siren's Song of Yield: The Mechanism and Market Appeal of USDe

USDe is a “synthetic dollar” (essentially a financial certificate) launched by Ethena Labs, with a market value that grew to about $14 billion before the big dump, making it the third largest stablecoin in the world. Its core mechanism differs from traditional dollar-backed stablecoins, as it does not rely on equivalent dollar reserves but instead maintains price stability through a strategy called “Delta neutral hedging.” This strategy specifically involves holding a long position in Ethereum (ETH) spot while shorting equivalent ETH perpetual contracts on derivatives exchanges. Its “base” APY, which can reach 12% to 15%, primarily comes from the funding rates of the perpetual contracts.

2.2 Building Super Leverage: A Step-by-Step Analysis of Circular Lending

The strategy that truly pushes the risk to the extreme is the so-called “circular borrowing” or “yield farming” strategy, which can amplify the annual yield to an astonishing 18% to 24%. This process usually goes as follows:

1. Staking: Investors use the USDe they hold as collateral in the lending protocol.
2. Lending: Based on the platform's Loan-to-Value (LTV) ratio, lend another stablecoin, such as USDC.
3. Exchange: Convert the borrowed USDC back to USDe in the market.
4. Re-staking: Deposit the newly acquired USD into the lending protocol again to increase its total collateral value.
5. Loop: Repeat the above steps 4 to 5 times, the initial capital can be increased by nearly four times.

This operation appears to be a rational maximization of capital efficiency at the micro level, but at the macro level, it constructs a highly unstable leverage pyramid.

To visually demonstrate the leverage effect of this mechanism, the table below simulates a hypothetical circular borrowing process with an initial capital of 100,000 USD and an LTV of 80%. (Data is not important, mainly focus on the logic)

From the table above, it can be seen that an initial capital of only 100,000 USD, after five rounds of cycles, can leverage a total position of over 360,000 USD. The core vulnerability of this structure lies in the fact that a slight decline in the total USD position value (for example, a fall of 25%) is sufficient to completely erode 100% of the initial capital, thereby triggering a forced liquidation of the entire position, which is far larger than the initial capital.

This circular borrowing model has created severe “liquidity mismatch” and “collateral illusion.” On the surface, huge amounts of collateral are locked in the lending protocols, but in reality, the true initial capital that has not been re-collateralized accounts for only a small portion of it. The total value locked (TVL) of the entire system is artificially exaggerated because the same funds are counted multiple times. This creates a situation similar to a bank run: when market panic occurs and all participants try to close their positions at the same time, they are all scrambling to exchange large amounts of USDe for the limited “real” stablecoins available in the market (such as USDC/USDT), which will lead to a collapse of USDe in the market (although this may not be related to the mechanism).

Part Three: Perspective of Large Holders: From Yield Farming to Forced Deleveraging

3.1 Strategy Building: Capital Efficiency and Maximization of Returns

For “whales” holding a large amount of altcoin spot, their core demand is to maximize the returns on their idle capital without selling assets (to avoid triggering capital gains tax and losing market exposure). Their mainstream strategy is to pledge their held altcoins on centralized or decentralized platforms such as Aave or Binance Loans to borrow stablecoins. Subsequently, they will invest these borrowed stablecoins into the highest-yielding strategy in the market at that time — the USDe circular lending loop mentioned earlier.

This actually constitutes a double-leverage structure:

• Leverage Level 1: Borrow stablecoin using volatile altcoins as collateral.
• Leverage Level 2: Invest the borrowed stablecoins into the recursive loop of USDe to further amplify leverage.

3.2 Preliminary Volatility: LTV Threshold Alert

Before the tariff news, the value of these large holders' altcoin assets used as collateral was actually in a state of floating loss, barely maintained by excessive margin; when the tariff news triggered an initial fall in the market, the value of these collateralized altcoin assets subsequently declined.

This directly led to an increase in their LTV ratio in the first layer of leverage. As the LTV ratio approached the liquidation threshold, they received a margin call notification. At this point, they had to either add more collateral or repay part of the loan, both of which required stablecoin.

3.3 On-chain Crash: Chain Reaction of Forced Liquidation

In order to respond to margin call requirements or actively reduce risk, these large holders began to unwind their circular borrowing positions in USDe. This triggered a huge selling pressure of USDe against USDC/USDT in the market. Due to the relatively weak liquidity of USDe in on-chain spot trading pairs, this concentrated selling pressure instantly collapsed its price, causing USDe to severely depeg on multiple platforms, with prices once falling to between 0.62 USD and 0.65 USD.

The decoupling of USDe has resulted in two synchronous devastating consequences:

• Internal liquidation of DeFi: The big dump in the price of USDe caused its value as a collateral for circular lending to shrink instantly, directly triggering the automatic liquidation process within the lending protocol. A system designed for high yields collapsed into a large-scale forced sell-off within minutes.
• CeFi spot liquidation: For those large holders who failed to timely add margin, lending platforms have begun to forcibly liquidate the altcoin spot they initially pledged to repay debts. This wave of selling pressure has directly impacted the already fragile altcoin spot market, exacerbating the price's downward spiral.

This process reveals a hidden, cross-domain risk transmission channel. A risk originating from the macro environment (tariffs) is transmitted through CeFi lending platforms (altcoin collateral loans) to DeFi protocols (USDe circulation), where it is sharply amplified within DeFi, and then the consequences of its collapse simultaneously backfire on the DeFi protocol itself (USDe disengagement) and the spot market of CeFi (altcoins being liquidated). The risk is not isolated within any single protocol or market sector, but flows smoothly across different domains through leverage as a transmission medium, ultimately triggering a systemic collapse.

Part Four: The Crucible of Market Makers: Collateral, Liquidity, and the Crisis of Unified Accounts

4.1 Pursuing Capital Efficiency: The Temptation of Earning Margin

Market makers (MM) maintain liquidity by continuously providing buy and sell quotes in the market, and their business is highly capital-intensive. To maximize capital efficiency, market makers commonly use the “Unified Account” provided by mainstream exchanges or the Cross-Margin model. In this model, all assets in their accounts can be used as unified collateral for their derivative positions.

Before the big dump, using the altcoins being market made as core Collateral (at different collateral ratios) and lending out stablecoin has become a popular strategy among market makers.

4.2 Collateral Shock: The Failure of Passive Leverage and Unified Accounts

When the collateral price of the altcoin experiences a big dump, the value of the account used by market makers as Margin instantly shrinks significantly. This produces a crucial consequence: it passively doubles their effective leverage ratio. A position that was originally considered “safe” with 2x leverage can overnight turn into a high-risk position with 3x or even 4x leverage due to the collapse of the denominator (collateral value).

This is precisely where the unified account structure becomes a vehicle for collapse. The exchange's risk engine does not care which asset has caused the margin shortfall; it only detects that the total value of the entire account has fallen below the margin level required to maintain all open derivative positions. Once the threshold is reached, the liquidation engine is automatically activated. It does not only liquidate the collateral of altcoins that have already experienced a big dump in value, but will also start to forcibly sell any liquid assets in the account to make up for the margin gap. This includes a large amount of altcoin spot held as inventory by market makers, such as BNSOL and WBETH. Moreover, at this point, BNSOL/WBETH is also being smashed down, further pulling other previously healthy positions into the liquidation system, causing collateral damage.

4.3 Liquidity Vacuum: Market Makers as Victims and Infectious Agents

At the same time that their own accounts were being liquidated, the market makers' automated trading systems also executed their primary risk management directive: withdrawing liquidity from the market. They massively canceled buy orders on thousands of altcoin trading pairs to recoup funds and avoid taking on more risk in a falling market.

This caused a catastrophic “liquidity vacuum.” At the moment when the market was flooded with a large number of sell orders (from collateral liquidations of major holders and the unified account liquidation of market makers), the main buyer support in the market suddenly disappeared. This perfectly explains why altcoins experienced such a drastic flash crash: due to the lack of buy orders on the order book, a large market sell order was enough to plummet the price by 80% to 90% within minutes, until it reached some scattered limit buy orders far below the market price.

In this event, another structural “catalyst” is the liquidation bots for clearing collateral. Once they reach the liquidation line, they will sell the corresponding collateral on the spot market, which leads to further falls of the altcoin, triggering more collateral liquidations (whether from large holders or market makers), resulting in a spiral liquidation event.

If the leverage environment is gunpowder, Trump's tariff war statement is fire, then the liquidation robot is oil.

Conclusion: Lessons from the Edge of the Cliff - Structural Vulnerabilities and Future Insights

Reviewing the causal chain of the entire event:

Macroeconomic shocks → Market risk aversion → USDe cyclical lending position liquidation → USDe decoupling → On-chain cyclical loan liquidation → Market maker collateral value big dump and passive leverage surge → Market maker unified account liquidated → Market maker withdraws market liquidity → Altcoin spot market collapse.

The market crash on October 11th is a textbook case that profoundly reveals how novel and complex financial instruments can introduce catastrophic, hidden systemic risks into the market in the pursuit of extreme capital efficiency. The core lesson from this incident is that the blurring of boundaries between DeFi and CeFi creates complex and unpredictable risk contagion pathways. When assets from one sector are used as collateral in another sector, a localized failure can quickly evolve into a crisis for the entire ecosystem.

This crash is a harsh reminder: in the crypto world, the highest yields often compensate for the highest and most hidden risks.

To know the reasons behind things, may we always hold a heart of reverence for the market.