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 such as 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 the perspectives of large position holders and market makers.
Part I: 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 that he would impose additional tariffs of up to 100% on all Chinese imports, effective November 1, 2025. This announcement quickly triggered a classic risk-off reaction in global financial markets, serving as the catalyst for the initial market sell-off.
Following the announcement of the tariff war, global markets plummeted. 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 reacted much more dramatically. Bitcoin prices plummeted 15% from their intraday highs, while altcoins suffered catastrophic flash crashes, with prices dropping 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 Amidst Speculative Frenzy
Even before the crash, the market was already rife with excessive speculation. Traders widely adopted highly leveraged strategies, attempting to "buy the dip" during every pullback to maximize profits. Meanwhile, high-yield DeFi protocols, such as USDe, rapidly emerged, offering ultra-high annualized yields that attracted a massive influx of return-seeking capital. This led to the formation of a systemically fragile environment within the market, built on complex, interconnected financial instruments. It could be said that the market itself was already a powder keg filled with potential leverage, waiting for a spark to ignite.
Part 2: Amplifying the Engine: Dismantling the USDe Loan Loop
2.1 The Siren Song of Yield: USDe’s Mechanism and Market Appeal
USDe, a "synthetic dollar" (effectively a financial certificate) launched by Ethena Labs, had grown to approximately $14 billion in market capitalization before its collapse, making it the world's third-largest stablecoin. Its core mechanism differs from traditional dollar-backed stablecoins in that it doesn't rely on an equivalent amount of USD reserves. Instead, it maintains price stability through a strategy known as "delta-neutral hedging." This strategy involves holding a long spot position in Ethereum (ETH) while simultaneously shorting an equivalent amount in ETH perpetual contracts on derivatives exchanges. Its high "base" APY of 12% to 15% is primarily derived from the perpetual contract funding rate.
2.2 The Construction of Super Leverage: A Step-by-Step Analysis of Circular Lending
What really pushes the risk to the extreme is the so-called "revolving lending" or "yield farming" strategy, which can magnify annualized returns to astonishing 18% to 24%. The process usually goes like this:
- Pledge: Investors pledge their USDe as collateral in a lending agreement.
- Lending: Lending another stablecoin, such as USDC, based on the platform’s loan-to-value (LTV) ratio.
- Exchange: Exchange the borrowed USDC back to USDe in the market.
- Re-collateralization: Depositing newly acquired USDe back into the lending agreement to increase its total collateral value.
- Cycle: Repeat the above steps 4 to 5 times, and the initial principal can be magnified nearly four times.
This operation seems to be a rational maximization of capital efficiency at the micro level, but at the macro level it constructs 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 can be seen in the table above, an initial capital of just $100,000 can leverage a total position of over $360,000 after five cycles. 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 much larger than the initial capital.
This circular lending model creates a severe liquidity mismatch and a "collateral illusion." While it appears that a significant amount of collateral is locked up in the lending protocol, in reality, only a small fraction of the original, uncollateralized capital is actually locked up. 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 USDDe holdings into the limited supply of "real" stablecoins (such as USDC/USDT) in the market, leading to a collapse of USDDe on the market (although this may be unrelated to the mechanism).
Part 3: 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 primary goal is to maximize returns on their idle capital without selling their assets (to avoid triggering capital gains taxes and losing market exposure). Their primary strategy is to stake their altcoin holdings on centralized or decentralized platforms like Aave or Binance Loans to borrow stablecoins. They then invest these borrowed stablecoins in the highest-yielding strategy available at the time—the aforementioned USDe lending loop.
This actually constitutes a double-leverage structure:
- Leverage Layer 1: Borrow stablecoins with volatile altcoins as collateral.
- Leverage layer 2: Put the borrowed stablecoins into the recursive loop of USDe to amplify the leverage again.
3.2 Initial shock: Alarm of LTV threshold
Before the tariff news, the value of the altcoin assets used as collateral by these large investors was actually in a floating loss state, and they were barely maintained by relying on excess margin; when the tariff news triggered the initial market decline, the value of these altcoin assets used as collateral also declined.
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 calls. At this point, they had to add more collateral or repay part of the loan, both of which required stablecoins.
3.3 On-chain Crash: Chain Reaction of Forced Liquidation
To meet margin calls or proactively mitigate risk, these large investors began unwinding their revolving lending positions on USDe. This triggered significant selling pressure on USDe against USDC/USDT. Due to the relatively thin liquidity of USDe's on-chain spot trading pairs, this concentrated selling pressure instantly crushed its price, causing USDe to depreciate significantly across multiple platforms, with prices plummeting to as low as $0.62 to $0.65.
The USDe’s unpegging had two simultaneous and devastating consequences:
- Internal DeFi Liquidation: The plummeting price of USDe instantly reduced 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.
- CeFi spot liquidations: For those large traders who failed to add margin in a timely manner, lending platforms began to forcibly liquidate their initially pledged altcoin spot positions to repay their debts. This selling pressure directly impacted the already fragile altcoin spot market, exacerbating the downward spiral in prices.
This process reveals a hidden, cross-sector risk contagion channel. A risk originating in the macro environment (tariffs) was transmitted to DeFi protocols (USDe circulation) through CeFi lending platforms (altcoin collateralized lending), where it was dramatically amplified within DeFi. The consequences of this collapse then backfired on both the DeFi protocols themselves (USDe depegging) and the CeFi spot market (altcoin liquidations). The risk was not isolated to any one protocol or market sector; instead, it flowed unimpeded across different sectors, using leverage as a transmission medium, ultimately triggering a systemic collapse.
Part 4: The Crucible of Market Makers: Collateral, Liquidity, and the Crisis of the Unified Account
4.1 Pursuing Capital Efficiency: The Allure of Interest-Bearing Margin
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. In this model, all assets in their accounts serve as unified collateral for their derivatives positions.
Before the crash, lending out stablecoins using the altcoins they were making markets in as core collateral (at varying collateralization ratios) became a popular strategy among market makers.
4.2 Collateral shock: Passive leverage and the failure of unified accounts
When the altcoin's collateral price plummets, the market maker's margin account value shrinks dramatically in an instant. This has a crucial consequence: it passively more than doubles its effective leverage. A position that was once considered "safe" with a 2x leverage can 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 a vector for 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 experienced a breakdown at this point, further impacting other previously healthy positions, causing collateral damage.
4.3 Liquidity Vacuum: Market Makers’ Dual Role as Victims and Infectors
As their own accounts were liquidated, the market makers’ automated trading systems executed their primary risk management directive: withdrawing liquidity from the market. They massively canceled buy orders on thousands of altcoin trading pairs, withdrawing funds to avoid taking on further risk in a falling market.
This created a devastating liquidity vacuum. At a moment when the market was flooded with sell orders (from large holders' collateral liquidations and market makers' own consolidated accounts), the market's primary source of buy support suddenly disappeared. This perfectly explains the dramatic flash crashes seen in 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 by 80% to 90% in a matter of minutes, until it reached a single, isolated limit buy order placed well below the market price.
Another structural catalyst in this incident is the collateral liquidation bots. When the liquidation line is reached, they will sell the corresponding collateral on the spot market, which causes the altcoin to fall further, thereby triggering more collateral liquidations (whether it is the collateral of large investors or market makers), leading to a spiral stampede.
If the leveraged environment is gunpowder, Trump's tariff war announcement is fire, and the liquidation robot is oil.
Conclusion: Lessons from the Cliffside: Structural Vulnerabilities and Future Implications
Review the causal chain of the entire incident:
Macroeconomic shock → Market risk aversion → USDe revolving lending positions liquidated → USDe depegging → On-chain revolving loan liquidation → Market maker collateral value plummets and passive leverage soars → Market maker unified account is liquidated → Market makers withdraw market liquidity → Altcoin spot market collapses.
The market crash of October 11th is a textbook example of 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.
The crash is a stark reminder that in the crypto world, the highest yields are often compensation for hedging the highest and most insidious risks.
Knowing both the facts and the reasons behind them, may we always hold the market in awe.
