What Caused the USDe Peg Deviation?

The Perfect Storm: A Timeline of the Crash

Understanding USDe's Structural Vulnerabilities

• The "Synthetic Dollar" Model: Unlike traditional stablecoins like USDT and USDC, which claim to be backed by real-world assets such as cash and U.S. Treasuries, USDe is a "synthetic dollar". It is generated when users deposit cryptocurrencies like Bitcoin or Ethereum. Ethena Labs, the issuer, then employs a "delta-neutral" hedging strategy. This involves holding the underlying crypto assets while simultaneously establishing equivalent short positions in the perpetual futures markets. Theoretically, this combination is designed to maintain a stable value pegged to the dollar regardless of market direction.
• High Returns and Hidden Risks: The model's appeal lay in its ability to generate high yields for holders, often around 5.5%, derived from the funding fees paid by perpetual contract traders. However, this very mechanism contained critical vulnerabilities. The stability of USDe was intrinsically linked to the smooth functioning and liquidity of derivatives markets. During the market crash, the hourly funding rate for Ethereum plunged to its lowest level in years, causing the core revenue-generating mechanism of USDe to falter. Furthermore, the stablecoin's spot liquidity was notoriously thin; reports indicated that a sell order of just $6 million could cause a 4% price slip, making it a fragile asset under pressure.

The Domino Effect: Cascading Liquidations and Platform Failures

• The Liquidation Cascade: The cryptocurrency market is built on leverage. As prices fell, leveraged long positions began to get liquidated automatically. This forced selling further drove down prices, triggering more liquidations in a vicious cycle. The situation was severely worsened because USDe was widely used as collateral for margin trading and loans. When its value dropped by over 35%, users who had posted USDe as collateral saw their borrowing power evaporate and their leverage multiply unintentionally, leading to forced liquidations of positions that would otherwise have been safe. Data from CoinGlass revealed that a staggering $19.1 - $19.3 billion was liquidated in 24 hours, with long positions accounting for over $16.6 billion of the total. This figure dwarfed previous liquidation records set during the COVID crash and the FTX collapse.
• The "USDe Loop" Trap: A particularly dangerous strategy, known as the " USDe loop," amplified the losses. Traders would stake (mortgage) USDe to borrow other stablecoins, use those stablecoins to mint more USDe, and repeat the process to build highly leveraged positions. When USDe depegged, this strategy backfired catastrophically, causing a spiral of automatic liquidations that dumped more USDe onto the market, fueling the downward price spiral.
• Exchange System Strain: At the peak of the volatility, major centralized exchanges experienced significant technical difficulties. Users on Binance, the world's largest crypto exchange, reported widespread system delays, order book failures, and an inability to execute trades or manage positions. This further eroded liquidity and trapped users, preventing them from taking defensive actions. Compounding the issue, Binance's ETH hot wallet reportedly automatically halted withdrawals due to high gas fees, which critically blocked the on-chain arbitrage path that could have helped restore USDe's peg.

Aftermath and Response: Compensation and a Call for Regulation

• Exchange Compensation and Mea Culpa: Facing immense pressure from the community, Binance acknowledged the issues and announced a compensation plan for affected users of its futures, margin, and lending products. The compensation, which was to be automatically distributed within 72 hours, covered the price difference for users liquidated due to the depegging of USDe, BNSOL, and WBETH between 05:36 and 06:16 (UTC+8) on October 11. Binance also pledged to strengthen its risk controls, including adding a minimum price limit for USDE and incorporating redemption prices into its index calculations. Binance co-founder He Yi also issued a public apology, though it was somewhat marred by a customer service miscommunication that sparked community anger.
• Ethena Labs' Defense: Ethena Labs, the creator of USDe, responded to the crisis by asserting that the protocol's minting and redemption functions never went offline and that USDe remained over-collateralized throughout the event. They released an off-schedule proof of reserves, verified by third parties like Chaos Labs and Chainlink, showing an excess collateral of about $66 million. Founder Guy Young dismissed much of the criticism as "FUD from unreliable sources".
• A Watershed Moment for Stablecoin Regulation: The event has ignited a fierce debate about the very nature of stablecoins. Some industry leaders have argued that USDe is not a true stablecoin but a "hedge fund product"or a high-yield savings instrument with significant, albeit hidden, risks. This distinction is crucial for future regulation. The event is widely seen as a catalyst that will push global regulators to accelerate the development of clear compliance frameworks for stablecoins, focusing on transparency, reserve backing, and risk management.

Conclusion: Lessons from Wreckage

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