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 on centralized derivatives exchanges. This article will examine the workings of this mechanism from two key perspectives: 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 tariff increase tweet. This announcement quickly triggered a classic risk-off reaction in global financial markets. This news served as the catalyst for the initial market sell-off. Following the announcement of the tariff war, global markets fell. 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's reaction was far more dramatic. Bitcoin's price plummeted 15% from its intraday high, while altcoins suffered catastrophic flash crashes, with prices plummeting 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 generally employed highly leveraged strategies, attempting to "buy the dip" during each pullback to maximize profits. At the same time, high-yield DeFi protocols, represented by USDe, have rapidly emerged, offering ultra-high annualized yields that have attracted a massive influx of return-seeking capital. This has 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 is already a powder keg filled with potential leverage, waiting for a spark to ignite. Part II: Amplifying the Engine: Dismantling the USDe Loop 2.1 The Siren Song of Yield: USDe’s Mechanism and Market Appeal Launched by Ethena Labs, USDe is a “synthetic dollar” (actually a financial certificate) whose market capitalization had grown to approximately $14 billion before its crash, 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 called “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's funding rate. 2.2 Building Super Leverage: A Step-by-Step Analysis of Revolving Lending The strategy that truly pushes risk to the extreme is the so-called "revolving lending" or "yield farming" strategy, which can amplify annualized returns to a staggering 18% to 24%. The process is typically as follows:
Pledge:Investors use their USDe as collateral in a lending agreement.
Borrow:Based on the platform's loan-to-value (LTV) ratio, another stablecoin, such as USDC, is borrowed.
Exchange:The borrowed USDC is exchanged back for USDe on the market.
Re-pledge:Deposit the newly acquired USDe back into the lending agreement to increase its total collateral value.
Loop:Repeat the above steps 4 to 5 times, and the initial principal can be magnified nearly fourfold.
This operation may seem 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 revolving lending process with an assumed LTV of 80% using an initial capital of $100,000. (The data is not important; the logic is key.) As the table above shows, with just $100,000 in initial capital, after five rounds of revolving lending, a total position of over $360,000 can be leveraged. The core vulnerability of this structure lies in the fact that even a slight drop 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 "collateral illusion." While the lending protocol appears to have a massive amount of collateral locked up, in reality, only a small fraction of the original, uncollateralized capital is actually present. 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 scramble to convert their massive USDe holdings into the limited supply of "real" stablecoins (such as USDC/USDT), which can lead to a USDe market crash (although this may be unrelated to the mechanism). Part III: 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 mainstream 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 actually constitutes a double-layer leverage structure: Leverage Layer 1: Borrowing stablecoins with volatile altcoins as collateral. Leverage Layer 2: Putting the borrowed stablecoins into the recursive cycle of USDe, amplifying the leverage again. 3.2 Initial Volatility: LTV Threshold Alerts 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 thanks to excess margin. Around the time the tariff news triggered the initial market decline, the value of these altcoin collateral also declined. This directly led to an increase in the LTV ratio of their first-layer leverage. As the LTV ratio approached the liquidation threshold, they received margin calls. At this point, they had to add more collateral or repay part of their loans, both of which required stablecoins. 3.3 On-Exchange Collapse: A Chain Reaction of Forced Liquidations To meet margin calls or proactively mitigate risk, these large traders began unwinding their revolving lending positions in USDe. This triggered significant selling pressure on USDe against USDC/USDT in the exchange market. 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 depegging on the exchange had two simultaneous and devastating consequences: Collateral Liquidation: The plummeting price of USDe instantly depleted 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 Liquidation: For large traders who failed to replenish margin in a timely manner, 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 reveals a hidden, cross-sector risk contagion channel. A risk originating in the macro environment (tariffs) is transmitted through lending platforms (altcoin collateralized lending) to the spot market (USDe circulation), amplified dramatically by collateral liquidations. The consequences of this collapse then backfire on both the stablecoin itself (USDe depegging) and the spot market (altcoin liquidations). The risk was not isolated to any one protocol or market sector; 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 Market Makers (MMs) maintain liquidity by continuously providing bid-ask quotes. Their business is 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 can 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 out stablecoins became a popular strategy among market makers. 4.2 Collateral Shock: The Failure of Passive Leverage and 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 (the collateral value). This is precisely where the unified account structure becomes the vector of collapse. The exchange's risk engine doesn't care which asset caused the margin shortage; 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 just liquidate the collateral of altcoins that have already plummeted in value; it begins forced sales of any liquid assets in the account to cover the margin shortfall. This includes the large amounts of altcoin spot held by market makers as inventory, such as BNSOL and WBETH. Furthermore, BNSOL/WBETH also plummeted at this point, further impacting other previously healthy positions within the liquidation system, causing collateral damage. 4.3 Liquidity Vacuum: Market Makers as Victims and Infectors Simultaneously with their own accounts being liquidated, the market makers' automated trading systems executed their primary risk management directive: withdrawing liquidity from the market. They massively canceled 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 position holders' collateral liquidations and from the market makers' own centralized accounts), the market's primary buyer 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, sporadic limit buy order placed well below the market price. Another structural catalyst in this incident was the liquidation bots, which liquidated collateral. Once the liquidation line was reached, they sold the corresponding collateral on the spot market, causing the altcoin's price to fall further, triggering more collateral liquidations (both from large traders and market makers), leading to a stampede. If the leverage environment is gunpowder, Trump's tariff announcement is the fire, and the liquidation bots are the oil.
Conclusion: Lessons from the cliff — — Structural loopholes and future implications
Review of the causal chain of the entire incident:
Macro shock → Market risk aversion → USDe revolving lending position liquidation → USDe de-anchoring → On-chain revolving loan liquidation → Market maker collateral value plummeted and passive leverage soared → Market maker unified account was liquidated → Market makers withdrew market liquidity → Altcoin spot market collapsed. The market crash on October 11th is a textbook example, revealing 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 creates complex and unpredictable risk contagion pathways. 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 serves as a stark reminder: in the crypto world, the highest returns are often compensation for hedging the highest and most hidden risks. Knowing both the facts and the reasons behind them, may we always maintain a reverent respect for the market.
Anais
Kikyo
Weatherly
Catherine
Joy