On October 11, 2025, this day was a nightmare for global cryptocurrency investors.

The price of Bitcoin plummeted from a high of $117,000, falling below $110,000 within hours. Ethereum's decline was even more severe, reaching 16%. Panic spread through the market like a virus, causing many altcoins to crash by 80-90% in an instant. Even though there was a slight rebound afterward, most still experienced a drop of 20% to 30%.

In just a few hours, the global cryptocurrency market lost hundreds of billions of dollars in market capitalization.

On social media, wails echoed, with languages from around the world merging into a single lament. But beneath the surface of panic, the real transmission chain was far more complex than it appeared.

The starting point of this crash was a statement from Trump.

On October 10, U.S. President Trump announced via his social media that starting November 1, he planned to impose an additional 100% tariff on all imported goods from China. The wording of this news was exceptionally harsh; he wrote that U.S.-China relations had deteriorated to the point of "no need for a meeting," and the U.S. would retaliate with financial and trade measures, justifying this new tariff war by citing China's monopoly on rare earths.

After the news broke, the global market was instantly thrown out of balance. The Nasdaq plummeted by 3.56%, marking one of the rarest single-day declines in recent years. The dollar index fell by 0.57%, crude oil dropped by 4%, and copper prices fell in tandem. The global capital market plunged into a panic sell-off.

In this epic liquidation, the popular stablecoin USDe became one of the biggest victims. Its de-pegging, along with the high-leverage circular lending system built around it, collapsed within hours.

This localized liquidity crisis quickly spread, with a large number of investors using USDe for circular lending being liquidated, causing the price of USDe to begin to de-peg across various platforms.

More seriously, many market makers also used USDe as collateral for contracts. When the value of USDe nearly halved in a short time, their positions' leverage passively doubled. Even seemingly safe one-time leveraged long positions could not escape the fate of liquidation. The prices of small coin contracts and USDe formed a double kill, resulting in heavy losses for market makers.

How Did the Dominoes of "Circular Lending" Fall?

The Temptation of 50% APY Returns

USDe, launched by Ethena Labs, is a "synthetic dollar" stablecoin. With a market capitalization of about $14 billion, it has risen to become the third-largest stablecoin globally. Unlike USDT or USDC, USDe does not have an equivalent dollar reserve but relies on a strategy called "Delta Neutral Hedging" to maintain price stability. It holds Ethereum spot while shorting equivalent Ethereum perpetual contracts on derivatives exchanges to hedge against volatility.

So, what attracted funds to flock in? The answer is simple: high returns.

Staking USDe itself can yield about 12% to 15% annualized returns, coming from the funding rates of perpetual contracts. In addition, Ethena has partnered with several lending protocols to provide extra rewards for USDe deposits.

What truly skyrocketed the yields was "circular lending." Investors repeatedly operated within lending protocols, collateralizing USDe, borrowing other stablecoins, and then converting them back into USDe for re-depositing. After several rounds of operations, the principal was magnified to nearly four times, and the annualized yield rose to a range of 40% to 50%.

In the world of traditional finance, an annualized return of 10% is already rare. The 50% return offered by USDe circular lending was almost an irresistible temptation for profit-seeking capital. Thus, funds continuously poured in, and the USDe deposit pool in lending protocols often reached "full capacity." Once new quotas were released, they would be snatched up in an instant.

The De-pegging of USDe

Trump's tariff remarks triggered panic in the global market, and the cryptocurrency market entered "risk-averse mode." Ethereum plummeted 16% in a short time, directly shaking the balance on which USDe relied. But what truly ignited the de-pegging of USDe was the liquidation of a large institution on the Binance platform.

Cryptocurrency investor and co-founder of Primitive Ventures, Dovey, speculated that the real trigger point was a large institution using a cross-margin model on the Binance platform (possibly a traditional trading company using cross-margin) being liquidated. This institution used USDe as cross-margin, and when the market fluctuated violently, the liquidation system automatically sold USDe to repay debts, causing its price on Binance to plummet to $0.60 at one point.

USDe's stability originally relied on two key conditions. One was a positive funding rate, meaning that in a bull market, short sellers had to pay fees to long holders, allowing the protocol to profit. The second was sufficient market liquidity, ensuring users could always exchange USDe at a price close to $1.

However, on October 11, both conditions collapsed simultaneously. Market panic led to a sharp rise in short-selling sentiment, and the funding rate for perpetual contracts quickly turned negative. The large short positions held by the protocol transformed from "paying parties" to "receiving parties," needing to continuously pay fees, which directly eroded the value of collateral.

Once USDe began to de-peg, market confidence rapidly disintegrated. More people joined the selling ranks, and the price continued to decline, forming a vicious cycle.

The Liquidation Spiral of Circular Lending

In lending protocols, when the value of a user's collateral falls to a certain level, the smart contract automatically triggers liquidation, forcibly selling the user's collateral to repay their debts. When the price of USDe drops, those positions that had added multiple leverage through circular lending quickly fell below the liquidation line.

The liquidation spiral was thus initiated.

Smart contracts automatically sold the USDe of liquidated users in the market to repay their borrowed debts. This further increased the selling pressure on USDe, causing its price to drop further. The price decline triggered more circular lending positions to be liquidated. This is a typical "death spiral."

Many investors may not realize until the moment of liquidation that their so-called "stablecoin investment" was actually a high-leverage gamble. They thought they were merely earning interest, unaware that the operations of circular lending had multiplied their risk exposure several times. When the price of USDe fluctuated violently, even those who considered themselves conservative investors could not escape the fate of liquidation.

Market Maker Liquidations and Market Collapse

Market makers are the "lubricants" of the market; they are responsible for placing orders and matching trades, providing liquidity for various cryptocurrency assets. Many market makers also used USDe as collateral on exchanges. When the value of USDe plummeted in a short time, the value of these market makers' collateral also significantly shrank, leading to forced liquidations of their positions on exchanges.

Statistics show that this cryptocurrency market crash resulted in hundreds of billions of dollars in liquidations. Notably, most of these hundreds of billions did not come solely from retail investors' one-way speculative positions but also from a large number of institutional market makers and arbitrageurs' hedged positions. In the case of USDe, these professional institutions originally used sophisticated hedging strategies to avoid risks, but when USDe, seen as a "stable" collateral asset, suddenly plummeted, all risk control models failed.

On derivative trading platforms like Hyperliquid, a large number of users faced liquidation, and holders of the platform's HLP (Liquidity Provider Vault) made a windfall of 40% overnight, with profits soaring from $80 million to $120 million. This figure indirectly proves the scale of the liquidations.

When market makers collectively faced liquidation, the consequences were catastrophic. Market liquidity was instantly drained, and bid-ask spreads widened sharply. For smaller market cap altcoins, which already had insufficient liquidity, this meant that prices accelerated their collapse due to the lack of liquidity on top of a general decline. The entire market fell into a panic sell-off, and a crisis triggered by a single stablecoin ultimately evolved into a systemic collapse of the entire market ecosystem.

Echoes of History: The Shadow of Luna

This scene felt eerily familiar to investors who experienced the bear market of 2022. In May of that year, a cryptocurrency empire named Luna collapsed in just seven days.

At the core of the Luna incident was an algorithmic stablecoin called UST. It promised annualized returns of up to 20%, attracting hundreds of billions of dollars in funds. However, its stability mechanism relied entirely on market confidence in another token, LUNA. When UST de-pegged due to massive sell-offs, confidence collapsed, the arbitrage mechanism failed, and ultimately led to the infinite issuance of LUNA tokens, with the price plummeting from $119 to less than $0.0001, erasing about $60 billion in market capitalization.

By juxtaposing the USDe incident with the Luna incident, we can find striking similarities. Both used returns far exceeding conventional rates as bait to attract a large amount of capital seeking stable returns. Both exposed the fragility of their mechanisms in extreme market conditions and ultimately fell into a "price decline, confidence collapse, liquidation sell-off, further price decline" death spiral.

They both evolved from a crisis of a single asset into a systemic risk affecting the entire market.

Of course, there are also some differences. Luna was a purely algorithmic stablecoin with no external asset collateral. In contrast, USDe had excess collateral in the form of cryptocurrencies like Ethereum. This gave USDe a stronger resistance during a crisis than Luna, which is why it did not completely go to zero like Luna.

Additionally, after the Luna incident, global regulators raised red flags regarding algorithmic stablecoins, which meant that USDe has lived under a stricter regulatory environment since its inception.

However, the lessons of history seem not to have been remembered by everyone. After the Luna collapse, many vowed to "never touch algorithmic stablecoins again." But just three years later, faced with USDe's circular lending offering annualized returns of up to 50%, people once again forgot the risks.

What is even more concerning is that this incident exposed not only the fragility of algorithmic stablecoins but also the systemic risks of institutional investors and exchanges. From the Luna explosion to the FTX collapse, from the chain liquidations of small and medium-sized exchanges to the crisis of the SOL ecosystem, this path was already traversed in 2022. Yet three years later, large institutions using cross-margin still employed high-risk assets like USDe as collateral, ultimately triggering a chain reaction amid market fluctuations.

Philosopher George Santayana once said, "Those who cannot remember the past are condemned to repeat it."

Respect the Market

There is an unbreakable iron rule in financial markets: risk and return are always proportional.

The reason USDT or USDC can only offer lower annualized returns is that they are backed by real dollar reserves, posing very low risk. USDe can offer 12% returns because it bears the potential risks of the Delta Neutral Hedging strategy in extreme situations. The reason USDe circular lending can provide 50% returns is that it adds four times the leverage risk on top of the base yield.

When someone promises you "low risk, high return," they are either a fraud or you have yet to understand where the risks lie. The danger of circular lending lies in the concealment of its leverage. Many investors do not realize that their repeated collateralized lending operations are, in fact, a form of high-leverage speculation. Leverage is a double-edged sword; it can amplify your gains in a bull market but will also double your losses in a bear market.

The history of financial markets repeatedly proves that extreme situations will inevitably occur. Whether it was the global financial crisis of 2008, the market crash in March 2020, or the Luna collapse in 2022, these so-called "black swan" events always arrive when people least expect them. The fatal flaw of algorithmic stablecoins and high-leverage strategies lies in their design intent, which is to bet that extreme situations will not happen. This is a gamble destined to lose.

Why do so many people rush in despite knowing the risks? Human greed, luck, and herd mentality may explain part of it. In a bull market, continuous success can numb people's risk awareness. When those around you are making money, few can resist the temptation. But the market will always remind you at some point, in the cruelest way: there is no such thing as a free lunch.

For ordinary investors, how can one survive in this turbulent ocean?

First, learn to identify risks. When a project promises "stable" returns exceeding 10%, when its mechanism is so complex that you cannot explain it in one sentence to an outsider, when its primary purpose is to generate profits rather than for actual application, when it lacks transparent and verifiable fiat reserves, and when it is being wildly promoted on social media, you should raise the alarm.

The principles of risk management are simple and eternal. Do not put all your eggs in one basket. Do not use leverage, especially not hidden high-leverage strategies like circular lending. Do not fantasize that you can escape before a crash; during the Luna collapse, 99% of people did not escape unscathed.

The market is far smarter than any individual. Extreme situations will definitely occur. When everyone is chasing high returns, it is often the time of greatest risk. Remember the lesson of Luna, where a market cap of $60 billion went to zero in seven days, and the savings of hundreds of thousands vanished. Remember the panic of October 11, where $280 billion evaporated in a matter of hours, leading to countless liquidations. Next time, such a story may happen to you.

Buffett said, "Only when the tide goes out do you discover who's been swimming naked."

In a bull market, everyone seems like an investment genius, and a 50% return appears within reach. But when extreme situations occur, you will find that you have long been standing on the edge of a cliff. Algorithmic stablecoins and high-leverage strategies have never been "stablecoin investments"; they are high-risk speculative tools. A 50% return is not a "free lunch," but rather bait at the edge of a cliff.

In financial markets, surviving is always more important than making money.

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