The most stable leverage creates the most chaotic situation: Trump started the fire, why should I pay the bill?

While Trump instigated this crash, its catastrophic destructive power stems from the highly leveraged environment inherent in 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 sophisticated market participants like market makers have collectively created a highly concentrated and extremely vulnerable risk node. The USDe price depegment acted as the first domino, triggering a chain reaction that spread from liquidations in on-chain DeFi protocols to large-scale deleveraging across centralized derivatives exchanges. This article will examine the workings of this mechanism from the perspectives of large position holders and market makers. Part I: Powder Keg x Spark: Macro Triggers and Market Vulnerabilities 1.1 Tariff Announcement: Catalyst, Not Root Cause The trigger for this market turmoil was Trump's announcement of plans to impose additional tariffs of up to 100% on all Chinese imports, effective November 1, 2025. This announcement quickly triggered a classic risk-off reaction in global financial markets, serving as the catalyst for the initial market sell-off. Following the announcement of the tariff war, global markets plummeted. The Nasdaq index plummeted over 3.5% in a single day, and the S&P 500 fell nearly 3%. Compared to traditional financial markets, the cryptocurrency market reacted much more dramatically. Bitcoin prices plummeted 15% from their intraday highs, while altcoins suffered catastrophic flash crashes, with prices dropping 70% to 90% in a short period of time. Total cryptocurrency contract liquidations across the entire network exceeded $20 billion. 1.2 Existing Situation: Market Malpractice Under Speculative Frenzy Before the crash, the market was already rife with excessive speculation. Traders widely adopted highly leveraged strategies, attempting to "buy the dip" during every pullback to maximize profits. At the same time, high-yield DeFi protocols, such as USDe, rapidly emerged, offering ultra-high annualized yields that attracted a massive influx of return-seeking capital. This led to the creation of a systemically fragile market environment built on complex, interconnected financial instruments. It could be said that the market itself was already a powder keg filled with potential leverage, waiting for a spark to ignite. Part Two: The Amplification Engine: Dissecting the USDe Loan Loop 2.1 The Siren Song of Yield: USDe's Mechanism and Market Appeal Launched by Ethena Labs, USDe is a "synthetic dollar" (effectively a financial certificate) whose market capitalization had grown to approximately $14 billion before its collapse, making it the world's third-largest stablecoin. Its core mechanism differs from traditional dollar-backed stablecoins in that it does not rely on an equivalent amount of USD reserves. Instead, it maintains price stability through a strategy known as "delta-neutral hedging." This strategy involves holding a long spot position in Ethereum (ETH) while simultaneously shorting an equivalent amount of ETH perpetual contracts on derivatives exchanges. Its "base" APY of 12% to 15% is primarily derived from the perpetual contract funding rate. 2.2 Super Leverage Construction: A Step-by-Step Analysis of Circular Lending The so-called "circular lending" or "yield farming" strategy, which truly pushes risk to the extreme, can amplify annualized returns to a staggering 18% to 24%. The process typically goes like this: Staking: Investors pledge their USDe as collateral in a lending agreement. Borrowing: Borrowing another stablecoin, such as USDC, based on the platform's loan-to-value (LTV) ratio. Redemption: Borrowing USDC back into USDe on the market.

Re-pledge: Deposit newly acquired USDe back into the lending protocol, increasing its total collateral value.

Circular: Repeat the above steps 4-5 times, and the initial principal can be magnified nearly fourfold.

This operation may appear rational at the micro level to maximize capital efficiency, but at the macro level it creates an extremely unstable leverage pyramid.

To more intuitively demonstrate the leverage effect of this mechanism, the following table simulates a circular lending process with an assumed LTV of 80% using an initial capital of $100,000. (The data isn't important; the logic is key.) As the table above shows, with just $100,000 in initial capital, after five cycles, a total position of over $360,000 can be leveraged. The core vulnerability of this structure lies in the fact that even a slight decline in the value of the total USDe position (for example, a 25% drop) is sufficient to completely erode 100% of the initial capital, triggering a forced liquidation of the entire position, which is far larger than the initial capital. This circular lending model creates a severe liquidity mismatch and a "collateral illusion." While it may appear that a massive amount of collateral is locked up in lending protocols, in reality, only a small fraction of the original, uncollateralized capital is actually locked up. The total value locked (TVL) of the entire system is artificially inflated because the same funds are counted multiple times. This creates a situation similar to a bank run: when the market panics and all participants attempt to liquidate their positions simultaneously, they all scramble to convert their massive USDe holdings into the limited supply of "real" stablecoins (such as USDC/USDT), which can lead to a collapse of USDe within the market (although this may be unrelated to the mechanism). Part 3: The Perspective of Large Holders: From Yield Farming to Forced Deleveraging 3.1 Strategy Construction: Capital Efficiency and Return Maximization For whales holding large amounts of altcoins, the core goal is to maximize the returns on their idle capital without selling their assets (to avoid triggering capital gains tax and losing market exposure). Their primary strategy is to stake their altcoin holdings on centralized or decentralized platforms such as Aave or Binance Loans to borrow stablecoins. They then invest these borrowed stablecoins in the highest-yielding strategy available at the time—the USDe circular lending loop described above. This effectively constitutes a two-layer leverage structure: Leverage Layer 1: Borrowing stablecoins using volatile altcoins as collateral. Leverage Layer 2: Borrowing stablecoins into a recursive USDe loop, further increasing leverage. 3.2 Initial Volatility: LTV Threshold Alert Before the tariff news, the value of the altcoin assets held as collateral by these large investors was already in a state of floating loss, barely maintaining their position by relying on excess margin. Around the time the tariff news triggered the initial market decline, the value of these altcoin collateral assets also declined. This directly led to an increase in their LTV ratios in the first-tier leverage. As their LTV ratios approached the liquidation threshold, they received margin calls. At this point, they had to either add more collateral or repay part of their loans, both of which required stablecoins. 3.3 On-Exchange (Exchange) Collapse: A Chain Reaction of Forced Liquidations To meet margin calls or proactively reduce risk, these large traders began unwinding their revolving lending positions in USDe. This triggered significant selling pressure on USDe against USDC/USDT on exchange markets. Due to the relatively thin liquidity of USDe spot trading pairs on exchanges, this concentrated selling pressure instantly crushed its price, causing USDe to depreciate significantly on multiple platforms, plummeting to as low as $0.62 to $0.65. The USDe unpegging on the exchange had two simultaneous and devastating consequences: Collateral liquidations: The plummeting price of USDe instantly reduced its value as collateral for revolving loans, triggering the automatic liquidation process within the lending protocol. A system designed for high returns collapsed into a massive forced sell-off within minutes. Spot liquidations: For large traders who failed to provide timely margin calls, lending platforms began forcibly liquidating their initially pledged altcoin spot positions to repay their debts. This selling pressure directly impacted the already fragile altcoin spot market, exacerbating the downward price spiral. This process revealed a hidden, cross-sector risk contagion channel. A risk originating in the macro environment (tariffs) was transmitted to the spot market (USDe circulation) through lending platforms (altcoin collateralized lending), where it was dramatically amplified during collateral liquidations. The consequences of this collapse then backfired on both the stablecoin itself (USDe depegging) and the spot market (altcoin liquidations). The risk wasn't isolated to any one protocol or market segment; instead, leverage served as a transmission medium, allowing it to flow unimpeded across different sectors, ultimately triggering a systemic collapse. Part IV: The Crucible of Market Makers: Collateral, Liquidity, and the Crisis of the Unified Account 4.1 The Pursuit of Capital Efficiency: The Allure of Interest-Bearing Margin Market makers (MMs) maintain liquidity by continuously providing bid-ask quotes in the market, making their operations highly capital-intensive. To maximize capital efficiency, market makers generally use the "Unified Account" or cross-margin model offered by major exchanges. Under this model, all assets in their accounts serve as unified collateral for their derivatives positions. Before the crash, using the altcoin they were making markets for as core collateral (at varying collateralization ratios) and lending stablecoins became a popular strategy among market makers. 4.2 Collateral Shock: Passive Leverage and the Failure of the Unified Account When the price of the altcoin collateral plummeted, the value of the market maker's margin account plummeted instantly. This had a crucial consequence: it passively more than doubled their effective leverage. A position that was once considered "safe" with a 2x leverage could become a risky 3x or even 4x leveraged position overnight due to the collapse of the denominator (collateral value). This is precisely where the unified account structure becomes a vector for collapse. The exchange's risk engine doesn't care which asset caused the margin shortfall; it only detects when the total value of the entire account falls below the margin required to maintain all open derivatives positions. Once the threshold is reached, the liquidation engine automatically activates. It doesn't simply liquidate the collateral of the plummeting altcoins; instead, it begins forced sales of any liquid assets in the account to cover the margin shortfall. This includes the large amounts of altcoins held by market makers as inventory, such as BNSOL and WBETH. Furthermore, BNSOL/WBETH also plummeted, further dragging other previously healthy positions into the liquidation system, causing collateral damage. 4.3 Liquidity Vacuum: Market Makers as Both Victims and Infectors As their own accounts were liquidated, the market makers' automated trading systems executed their primary risk management directive: withdrawing liquidity from the market. They massively canceled their buy orders across thousands of altcoin trading pairs, withdrawing funds to avoid taking on further risk in a falling market. This created a catastrophic "liquidity vacuum." At a moment when the market was flooded with sell orders (from large holders' collateral liquidations and market makers' own consolidated accounts), the market's primary buying support suddenly disappeared. This perfectly explains the dramatic flash crashes experienced by altcoins: due to a lack of buy orders on the order book, a single large market sell order was enough to drive the price down 80% to 90% in a matter of minutes, until it hit a single, isolated limit buy order placed well below the market price. Another structural catalyst in this incident was the collateral liquidation bots. Once the liquidation line was reached, they would sell the corresponding collateral on the spot market, causing the altcoin's price to fall further, triggering more collateral liquidations (both from large holders and market makers), leading to a stampede. If the leverage environment is gunpowder and Trump's tariff war announcement is fire, then liquidation robots are the oil. Conclusion: Lessons from the Cliffside - Structural Vulnerabilities and Future Implications Reviewing the causal chain of the entire incident: Macroeconomic shock → Market risk aversion → Liquidation of USDe revolving lending positions → USDe depegging → On-chain revolving loan liquidation → Plummeting market maker collateral value and surge in passive leverage → Liquidation of market maker unified accounts → Market maker withdrawal of market liquidity → Collapse of altcoin spot market. The market crash on October 11th is a textbook example of how novel and complex financial instruments, in the pursuit of extreme capital efficiency, can introduce catastrophic, hidden systemic risks into the market. The core lesson of this incident is that the blurring of the lines between DeFi and CeFi has created complex and unpredictable paths for risk contagion. When assets in one sector are used as underlying collateral in another, a localized failure can quickly escalate into a crisis for the entire ecosystem. This crash is a stark reminder: in the crypto world, the highest yields are often a reward for hedging the highest and most hidden risks.