Unveiling the USDe Circular Loan: The Chain Collapse Mechanism of 20 Billion USD Contract Liquidation

The cryptocurrency crash that led to over 20 billion USD in contract liquidations across the network was superficially ignited by Trump's tariff war, but in reality, it was the high-leverage pyramid built on the USDe circular loan strategy that came crashing down. When the stablecoin USDe depegged to 0.62 USD, a systemic crisis quickly erupted, spreading from on-chain DeFi to Centralized Exchanges.

USDe Circulation Loan Mechanism: How to Build the Leverage Pyramid

USDe is a synthetic USD stablecoin launched by Ethena Labs, with a market capitalization reaching 14 billion USD before the collapse, ranking as the third largest stablecoin in the world. Its core mechanism maintains price stability through “Delta Neutral Hedging”: holding a long position in Ethereum ETH spot while simultaneously shorting an equivalent amount of ETH perpetual contracts. This strategy yields an annual percentage yield (APY) of 12% to 15%, with funding rates becoming the primary source of income.

· Super Leverage of Circular Loans

The strategy that truly pushes risk to the extreme is the “USDe Circulating Loan” strategy, which can amplify the annual yield to 18% to 24%. The operation process is as follows:

Step 1: Stake USDe

Investors will deposit USDe into lending agreements (such as Aave) as collateral.

Step 2: Lend stablecoin

Borrow USDC based on an 80% loan-to-value (LTV) ratio.

### Step 3: Exchange and Re-stake

Exchange USDC back to USDe and deposit it into the protocol again.

### Step 4: Infinite Loop

Repeat 4 to 5 times, the initial principal can be enlarged by nearly 4 times.

For example, with an initial capital of 100,000 USD, after five rounds of cycles, it can leverage a total position of over 360,000 USD. The fatal flaw of this structure is that a mere 25% drop in the price of USDe is enough to erode 100% of the initial capital, triggering a forced liquidation of the entire position.

The Crisis of Collateral Illusion

This model creates a serious “liquidity mismatch.” The same funds are counted multiple times, artificially inflating the total value locked (TVL). When market panic occurs, all participants attempt to simultaneously exchange large amounts of USDe for a limited supply of real stablecoins (USDC/USDT), which instantly triggers a collapse in the market.

Double Blow: The Collapse Path of Large Holders

Whales holding a large amount of altcoins have constructed a double-layer leverage structure to maximize profits:

Leverage Level 1: Stake altcoin spot and borrow stablecoin on CEX.

Leverage Layer 2: Invest the borrowed stablecoin into the USDe circular loan to amplify leverage again.

When Trump's tariff news triggered a market downturn, the collateral value of these whales' altcoins declined, and the LTV ratio approached the liquidation threshold. In response to the margin call requirements, they were forced to unwind their USDe circular loan positions.

The chain reaction of USDe decoupling

Large holders concentrated on selling USDe for USDC/USDT, causing the weak liquidity of the exchange to collapse instantly, leading to a severe decoupling of USDe on multiple platforms, with prices falling to between 0.62 and 0.65 USD. This resulted in dual destructive consequences:

Collateral Liquidation: The price of USDe plummeting has caused the value of the collateral to shrink, triggering the automatic liquidation of the lending agreement.

Spot liquidation: Lending platforms forcibly liquidate large holders' pledged altcoin spot, exacerbating the spiral price decline.

Risk is transmitted through leverage as a medium, flowing smoothly between the stablecoin market and the altcoin spot market, ultimately leading to a systemic collapse.

The Destructive Cycle of Market Makers: Liquidity Vacuum Effect

· The Trap of Unified Accounts

Market Makers (MM) generally use the “Unified Account” or full margin model of exchanges to pursue capital efficiency. In this model, all assets in the account can serve as unified collateral for derivative positions. Many market makers use altcoins such as BNSOL and WBETH as core collateral and borrow stablecoins for other operations.

· Passive Leverage Soars

When the price of the collateral for altcoins plummets, the account value of market makers drastically shrinks, passively increasing the effective leverage ratio by more than double. Originally “safe” 2x leveraged positions become high-risk 3 to 4x leveraged positions due to the collapse of the denominator (collateral value).

The risk engine of the exchange has detected that the total value is below the maintenance margin level, and the liquidation engine will automatically start. It not only liquidates the depreciated altcoin collateral but also forcibly sells any liquid assets in the account, including the large spot inventory of altcoins held by market makers.

· The Disaster of Liquidity Evaporation

At the same time as their own accounts were being liquidated, the market maker's automated trading system executed risk management instructions: a large-scale cancellation of buy orders for thousands of altcoin trading pairs, withdrawing liquidity from the market.

This caused a catastrophic “liquidity vacuum.” The market is flooded with a large number of sell orders (from the liquidations of large holders and market makers), but the main buying support suddenly disappears. The order book lacks buy orders, and a large market sell order is enough to push the price down by 80% to 90% within a few minutes.

· The Accelerator Effect of Liquidation Bots

The liquidation collateral liquidation robots become structural catalysts. When the liquidation line is reached, they sell the corresponding collateral on the spot market, leading to further declines in altcoins and triggering more liquidations, creating a spiral downtrend. If the leveraged environment is gunpowder, and Trump tariffs are the spark, then the liquidation robots are the fuel.

Market Crash Revelation: Systemic Risks Behind High Returns

The complete causal chain of this event is clearly visible:

Macroeconomic shocks → Market risk aversion → USDe cyclical loan liquidation → USDe depegging → On-chain settlement → Market maker collateral crash → Unified account liquidation → Liquidity withdrawal → Altcoin crash

This crash revealed how pursuing extreme capital efficiency can introduce catastrophic hidden risks through complex financial instruments. The blurred lines between DeFi and CeFi have created complex and unpredictable paths of risk contagion. When assets from one domain are used as collateral in another domain, localized failures can quickly evolve into a crisis for the entire ecosystem.

Core lesson: In the crypto world, the highest returns are often a compensation for the highest and most hidden risks.