Although this crash was ignited by Trump, its catastrophic destructive power stems from the high-leverage environment within the native financial system of the crypto market. The high-yield stablecoin USDe, the recursive "loop lending" strategy built around it, and its widespread use as collateral by market makers and other mature market participants have collectively created a highly concentrated and extremely fragile risk node.

The price decoupling event of USDe was like the first domino, triggering a chain reaction of massive deleveraging that spread from on-chain DeFi protocol liquidations to centralized derivatives exchanges. This article will dissect the operational principles of this mechanism from the perspectives of large holders and market makers.

Part One: Powder Keg x Spark: Macro Triggers and Market Fragility

1.1 Tariff Announcement: A Catalyst, Not a 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 starting November 1, 2025. This announcement quickly sparked a classic risk-averse reaction in global financial markets, becoming the catalyst for the initial sell-off.

Following the tariff war news, global markets fell sharply. The Nasdaq index plummeted over 3.5% in a single day, and the S&P 500 index dropped nearly 3%. Compared to traditional financial markets, the reaction in the cryptocurrency market was much more severe. Bitcoin's price crashed 15% from its intraday high, while Altcoins experienced catastrophic flash crashes, with prices plummeting 70% to 90% in a short time. The total liquidation of cryptocurrency contracts across the network exceeded $20 billion.

1.2 Existing Conditions: Market Accumulation Under Speculative Frenzy

Before the crash, the market was already rife with excessive speculative sentiment. Traders commonly employed high-leverage strategies, attempting to "buy the dip" for greater profits during each pullback. Meanwhile, high-yield DeFi protocols represented by USDe rapidly emerged, attracting massive amounts of capital seeking returns with their extraordinarily high annualized yields. This led to the formation of a systemically fragile environment built on complex, interrelated financial instruments within the market. It can be said that the market itself had become a powder keg filled with potential leverage, just waiting for a spark to ignite it.

Part Two: Amplification Engine: Dissecting the USDe Loop Lending Circuit

2.1 The Siren Song of Yields: The Mechanism and Market Appeal of USDe

USDe, launched by Ethena Labs, is a "synthetic dollar" (essentially a financial certificate) that had grown to a market cap of approximately $14 billion before the crash, making it the third-largest stablecoin globally. Its core mechanism differs from traditional dollar-backed stablecoins; it does not rely on equivalent dollar reserves but maintains price stability through a strategy known as "Delta-neutral hedging." This strategy involves holding a long position in Ethereum (ETH) while shorting equivalent ETH perpetual contracts on derivatives exchanges. Its "base" APY of 12% to 15% primarily comes from the funding rates of perpetual contracts.

2.2 Building Super Leverage: Step-by-Step Analysis of Loop Lending

What truly pushed the risk to the extreme was the so-called "loop lending" or "yield farming" strategy, which could amplify annualized yields to an astonishing 18% to 24%. This process typically unfolds as follows:

1. Pledge: Investors use their USDe as collateral in a lending protocol.
2. Borrowing: Based on the platform's loan-to-value (LTV) ratio, they borrow another stablecoin, such as USDC.
3. Exchange: They exchange the borrowed USDC back to USDe in the market.
4. Re-pledge: They deposit the newly acquired USDe back into the lending protocol, increasing its total collateral value.
5. Loop: Repeat steps 4 to 5, amplifying the initial capital nearly fourfold.

While this operation may seem like rational capital efficiency maximization on a micro level, it constructs an extremely unstable leverage pyramid on a macro level.

To illustrate the leverage effect of this mechanism more intuitively, the following table simulates a hypothetical loop lending process with an initial capital of $100,000, assuming an LTV of 80%. (Data is not important; the logic is key.)

As seen in the table, an initial capital of just $100,000 can leverage over $360,000 in total positions after five rounds of looping. The core fragility of this structure lies in the fact that if the total value of USDe positions experiences a slight decline (for example, a 25% drop), it would completely erode 100% of the initial capital, triggering forced liquidation of positions far larger than the initial capital.

This loop lending model creates severe "liquidity mismatches" and "collateral illusions." On the surface, a massive amount of collateral appears locked in the lending protocol, but in reality, the true, non-repeatedly pledged initial capital constitutes only a small portion of it. The total value locked (TVL) of the entire system is artificially inflated because the same funds are counted multiple times. This creates a situation akin to a bank run: when market panic ensues, all participants attempt to close their positions simultaneously, scrambling to exchange large amounts of USDe for the limited "real" stablecoins available in the market (such as USDC/USDT), which would lead to a collapse of USDe in the market (though this may not be related to the mechanism).

Part Three: The Perspective of Large Holders: From Yield Farming to Forced Deleveraging

3.1 Strategy Construction: Capital Efficiency and Yield Maximization

For "whales" holding large amounts of altcoin spot assets, their core demand is to maximize the yield on their idle capital without selling assets (to avoid triggering capital gains tax and losing market exposure). Their mainstream strategy is to pledge their altcoins on centralized or decentralized platforms like Aave or Binance Loans to borrow stablecoins. Subsequently, they would invest these borrowed stablecoins into the highest-yielding strategies available in the market at that time—the aforementioned USDe loop lending circuit.

This effectively constitutes a double-layer leverage structure:

• Leverage Layer 1: Borrowing stablecoins against volatile altcoins as collateral.
• Leverage Layer 2: Investing the borrowed stablecoins into the recursive loop of USDe, further amplifying leverage.

3.2 Initial Shock: LTV Threshold Alerts

Before the tariff news, the value of the altcoin assets used as collateral by these large holders was already in a state of unrealized loss, barely maintained by excessive margin; as the tariff news triggered the initial market decline, the value of these collateral altcoin assets also fell.

This directly led to an increase in their LTV ratio in the first layer of leverage. As the LTV ratio approached the liquidation threshold, they received margin call notifications. At this point, they had to either supplement more collateral or repay part of the loan, both of which required stablecoins.

3.3 On-Chain Collapse: The Chain Reaction of Forced Liquidations

To meet margin call requirements or proactively reduce risk, these large holders began to unwind their loop lending positions in USDe. This triggered immense selling pressure of USDe against USDC/USDT in the market. Due to the relatively weak liquidity of USDe in on-chain spot trading pairs, this concentrated selling pressure instantly crushed its price, causing USDe to severely decouple on multiple platforms, with prices dropping to as low as $0.62 to $0.65.

The decoupling of USDe produced two synchronous devastating consequences:

• Internal DeFi Liquidations: The plummeting price of USDe caused its value as collateral for loop lending to shrink instantly, directly triggering the automatic liquidation processes within the lending protocols. The system designed for high yields collapsed into a massive forced sell-off within minutes.
• CeFi Spot Liquidations: For those large holders who failed to timely meet margin calls, lending platforms began to forcibly liquidate their initially pledged altcoin spots to repay debts. This selling pressure directly impacted the already fragile altcoin spot market, exacerbating the spiral decline in prices.

This process revealed a hidden, cross-domain risk contagion channel. A risk originating from the macro environment (tariffs) transmitted through CeFi lending platforms (altcoin collateral loans) to DeFi protocols (USDe loop), was sharply amplified within DeFi, and then the consequences of its collapse simultaneously backfired on both the DeFi protocol itself (USDe decoupling) and the CeFi spot market (altcoins being liquidated). The risk was not isolated within any single protocol or market segment but flowed freely across different domains through leverage as a transmission medium, ultimately triggering a systemic collapse.

Part Four: The Crucible of Market Makers: The Crisis of Collateral, Liquidity, and Unified Accounts

4.1 Pursuit of Capital Efficiency: The Temptation of Yielding Margins

Market makers (MM) maintain liquidity by continuously providing bid and ask quotes in the market, and their business is highly capital-intensive. To maximize capital efficiency, market makers commonly use the "Unified Account" or cross-margin model provided by mainstream exchanges. In this model, all assets in their accounts can serve as unified collateral for their derivative positions.

Before the crash, using their market-making altcoins as core collateral (at varying collateral rates) and borrowing stablecoins became a popular strategy among market makers.

4.2 Collateral Shock: Passive Leverage and the Failure of Unified Accounts

When the price of the altcoin collateral plummeted, the value of the accounts used as margin for market makers instantly shrank significantly. This produced a crucial consequence: it passively doubled their effective leverage ratio. A position originally considered "safe" at 2x leverage could, due to the collapse of the denominator (collateral value), overnight transform into a high-risk 3x or even 4x leveraged position.

This is where the unified account structure became a vehicle for collapse. The exchange's risk engine does not care which asset caused the margin shortfall; it only detects that the total value of the entire account has fallen below the margin level required to maintain all open derivative positions. Once the threshold is reached, the liquidation engine automatically activates. It does not only liquidate the altcoin collateral that has already lost value but will begin to forcibly sell any liquid assets in the account to cover the margin gap. This includes a large amount of altcoin spot held by market makers as inventory, such as BNSOL and WBETH. Moreover, at this time, BNSOL/WBETH was also being crushed, further dragging other previously healthy positions into the liquidation system, causing collateral damage.

4.3 Liquidity Vacuum: Market Makers as Dual Roles of Victims and Transmission Medium

As their own accounts were being liquidated, the automated trading systems of market makers also executed their primary risk management directive: withdrawing liquidity from the market. They massively canceled buy orders across thousands of altcoin trading pairs to recoup funds and avoid taking on more risk in a declining market.

This created a catastrophic "liquidity vacuum." At the moment when the market was flooded with a large number of sell orders (from the liquidations of large holders' collateral and the market makers' own unified account liquidations), the primary buying support in the market suddenly vanished. This perfectly explains why altcoins experienced such severe flash crashes: due to the lack of buy orders on the order book, a large market sell order was sufficient to drive prices down by 80% to 90% within minutes, until it reached some scattered limit buy orders far below the market price.

In this event, another structural "catalyst" was the liquidation bots for collateral. Once the liquidation threshold was reached, they would sell the corresponding collateral on the spot market, leading to further declines in the altcoin's price, which triggered more collateral liquidations (whether from large holders or market makers), resulting in a spiral liquidation event.

If the leverage environment is the gunpowder, Trump's tariff war announcement is the fire, then the liquidation bots are the oil.

Conclusion: Lessons on the Edge of the Cliff—Structural Vulnerabilities and Future Insights

Looking back at the causal chain of the entire event:

Macro Shock → Market Risk Aversion → Liquidation of USDe Loop Lending Positions → USDe Decoupling → On-Chain Loop Loan Liquidations → Plummeting Value of Market Maker Collateral and Surging Passive Leverage → Liquidation of Market Maker Unified Accounts → Market Makers Withdraw Liquidity → Collapse of the Altcoin Spot Market.

The market crash on October 11 is a textbook case that profoundly reveals how the pursuit of extreme capital efficiency can introduce catastrophic, hidden systemic risks into the market through novel and complex financial instruments. The core lesson from this event is that the blurring of boundaries between DeFi and CeFi creates complex and unpredictable risk contagion pathways. When assets from one domain are used as collateral in another, a localized failure can quickly evolve into a crisis for the entire ecosystem.

This crash serves as a harsh reminder: in the crypto world, the highest yields often come with the highest and most concealed risks as compensation.

Understanding both the phenomenon and its underlying reasons, may we always carry a sense of reverence for the market.

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