October 11, 2025, is a nightmare for crypto investors around the world.

The price of Bitcoin plummeted from a high of $117,000, falling below $110,000 within hours. Ethereum's drop was even more severe, reaching 16%. Panic spread through the market like a virus, causing numerous altcoins to experience flash crashes of 80-90%. Even those that subsequently rebounded saw drops of 20-30%.

In just a few hours, hundreds of billions of dollars were wiped out of the global crypto market.

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

The starting point of this collapse was a sentence from Trump.

On October 10, US President Trump announced via social media that he planned to impose an additional 100% tariff on all imports from China, effective November 1. The message was unusually strong. He wrote that Sino-US relations had deteriorated to the point where "a meeting is unnecessary," and that the US would retaliate with financial and trade measures. He also cited China's rare earth monopoly as justification for this new tariff war.

The news instantly unleashed a global market turmoil. The Nasdaq plummeted 3.56%, a rare single-day drop in recent years. The US dollar index fell 0.57%, crude oil plummeted 4%, and copper prices also declined. Panic selling gripped global capital markets.

In this epic liquidation, the popular stablecoin USDe became one of the biggest casualties. Its depegging, along with the highly leveraged revolving loan system built around it, collapsed within a few hours.

This local liquidity crisis spread rapidly, and a large number of investors who used USDe for revolving lending were liquidated, and the price of USDe began to decouple on various platforms.

Even more serious, many market makers also used USDe as margin for their contracts. When the value of USDe nearly halved in a short period of time, their leverage was passively doubled. Even seemingly safe long positions with 1x leverage were doomed to failure. The combined effects of the price of small-cap contracts and USDe caused significant losses for market makers.

How did the dominoes of "revolving loans" fall?

The allure of 50% APY returns

Launched by Ethena Labs, USDe is a "synthetic dollar" stablecoin. With a market capitalization of approximately $14 billion, it has become the world's third-largest stablecoin. Unlike USDT or USDC, USDe does not have an equivalent amount of US dollar reserves. Instead, it relies on a strategy known as "delta-neutral hedging" to maintain price stability. It holds spot Ethereum while simultaneously shorting an equivalent amount of Ethereum perpetual contracts on derivatives exchanges, using this hedging strategy to offset volatility.

So, what is attracting so much money? The answer is simple: high returns.

Staking USDe itself can earn an annualized return of approximately 12% to 15%, which comes from the funding rate of perpetual contracts. In addition, Ethena has partnered with multiple lending protocols to provide additional rewards for USDe deposits.

What really drove the yield surge was revolving lending. Investors repeatedly operated within the lending agreement, collateralizing USDe, borrowing other stablecoins, and then redeeming USDe. After several rounds of this, the principal was nearly quadrupled, and the annualized return rose to 40% to 50%.

In the world of traditional finance, a 10% annualized return is rare. However, the 50% yield offered by USDe revolving loans is an almost irresistible temptation for profit-seeking investors. As a result, funds continue to pour in, and the USDe deposit pools in lending protocols are often "full." Any new quota released is quickly snapped up.

USDe's unmooring

Trump's tariff rhetoric triggered panic in global markets, sending the crypto market into a risk-off mode. Ethereum plummeted 16% in a short period of time, directly destabilizing the USDe (USDe)'s stability. However, the real trigger for USDe's devaluation was the liquidation of a large institutional investor on the Binance platform.

Dovey, a crypto investor and co-founder of Primitive Ventures, speculates that the real trigger was the liquidation of a large institution (possibly a traditional cross-margin trading firm) on the Binance platform that used a cross-margin model. This institution used USDe as cross-margin, and when the market fluctuated violently, the liquidation system automatically sold USDe to repay the debt, causing its price on Binance to plummet to $0.6.

USDe's stability relies on two key conditions. First, a positive funding rate—in a bull market, short sellers pay long sellers, allowing the protocol to profit. Second, sufficient market liquidity ensures that users can redeem USDe at a price close to $1 at any time.

But on October 11th, both of these conditions collapsed simultaneously. Market panic led to a sharp increase in short selling sentiment, and the funding rate for perpetual swaps quickly turned negative. The protocol, which previously had been a "fee collector," became a "payer," requiring continuous payment, which directly eroded the value of its collateral.

Once USDe begins to decouple, market confidence quickly collapses. More people join the sell-off, pushing prices further downwards, and a vicious cycle is fully formed.

The liquidation spiral of revolving loans

In lending protocols, when the value of a user's collateral drops below a certain level, the smart contract automatically triggers liquidation, forcing the sale of the user's collateral to repay their debt. When the price of USDe falls, the health of positions that have been leveraged multiple times through revolving loans quickly falls below the liquidation threshold.

The liquidation spiral begins.

The smart contract automatically sells the liquidated users' USDe on the market to repay their borrowed debt. This further increases selling pressure on USDe, causing its price to fall further. This price drop, in turn, triggers the liquidation of even more revolving loan positions. This is a classic "death spiral."

Many investors may not realize until their positions are liquidated that their so-called "stablecoin investment" is actually a highly leveraged gamble. They thought they were simply earning interest, but they were unaware that the revolving loans had multiplied their risk exposure. When USDe prices fluctuate wildly, even those who consider themselves conservative investors cannot escape liquidation.

Market Maker Explosions and Market Crash

Market makers are the lubricant of the market, responsible for placing orders, matching orders, and providing liquidity for various crypto assets. Many market makers also use USDe as margin on exchanges. When the value of USDe plummets in a short period of time, the value of these market makers' margins also plummets, resulting in forced liquidation of their positions on exchanges.

Statistics show that the crypto market crash resulted in tens of billions of dollars in liquidations. Notably, the majority of these billions of dollars came not just from one-way speculative positions held by retail investors, but also from the hedging positions of numerous institutional market makers and arbitrageurs. In the case of USDe, these professional institutions had initially employed sophisticated hedging strategies to mitigate risk. However, when USDe, a perceived "stable" margin asset, suddenly plummeted, all risk control models were rendered ineffective.

On derivatives trading platforms like Hyperliquid, a large number of users experienced margin calls, and the platform's HLP (liquidity provider vault) holders saw profits surge by 40% overnight, from $80 million to $120 million. This figure indirectly demonstrates the massive scale of the margin calls.

When market makers collectively go bankrupt, the consequences are catastrophic. Market liquidity is instantly drained, and bid-ask spreads widen dramatically. For altcoins with smaller market capitalizations and already limited liquidity, this means that the lack of liquidity accelerates the price collapse, accelerating the general decline. The entire market is plunged into panic selling, and a crisis triggered by a single stablecoin ultimately devolves into a systemic collapse of the entire market ecosystem.

Echoes of History: Luna's Shadow

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

At the heart of the Luna incident lies an algorithmic stablecoin called UST. It promised annualized returns of up to 20%, attracting tens of billions of dollars in capital. However, its stability mechanism relied entirely on market confidence in another token, LUNA. When UST decoupled from its peg due to a massive sell-off, confidence collapsed, the arbitrage mechanism failed, and ultimately led to an unlimited issuance of LUNA tokens. The price plummeted from $119 to less than $0.0001, wiping out approximately $60 billion in market capitalization.

Juxtaposing the USDe and Luna incidents reveals striking similarities. Both used the lure of exceptionally high yields to attract large amounts of capital seeking stable returns. Both exposed the fragility of their mechanisms in extreme market conditions, ultimately falling into a death spiral of falling prices, collapsing confidence, liquidation selling, and further price declines.

They all evolved from a crisis of a single asset to a systemic risk that affected the entire market.

Of course, there are some differences between the two. Luna is a purely algorithmic stablecoin, without any external collateral. USDe, on the other hand, is overcollateralized by crypto assets like Ethereum. This makes USDe more resilient than Luna in the face of a crisis, which is why it hasn't completely collapsed to zero like Luna.

In addition, after the Luna incident, global regulators have issued a red card to algorithmic stablecoins, which has made USDe live in a more stringent regulatory environment since its inception.

However, the lessons of history don't seem to have been fully heeded. After the Luna debacle, many vowed to "never touch algorithmic stablecoins again." But just three years later, faced with the 50% annualized returns on USDe revolving loans, people once again forgot the risks.

What's more alarming is that this incident exposes not only the fragility of algorithmic stablecoins, but also the systemic risks posed by institutional investors and exchanges. From the Luna debacle to the collapse of FTX, from the serial liquidations of small and medium-sized exchanges to the crisis of the SOL ecosystem, this path has already been traversed in 2022. Yet, three years later, large institutions using cross-margin trading are still using high-risk assets like USDe as margin, ultimately triggering a chain reaction amidst market volatility.

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

Respect the market

There is an irrefutable law in the financial market: risk and return are always proportional.

USDT and USDC offer only low annualized returns because they are backed by real US dollar reserves and carry extremely low risk. USDe offers a 12% return because it assumes the potential risk of a delta-neutral hedging strategy under extreme circumstances. And a USDe revolving loan offers a 50% return because it adds four times the leverage risk on top of the base return.

When someone promises you "low risk, high returns," they're either a scammer or you haven't understood the risks. The danger of revolving loans lies in their hidden leverage. Many investors don't realize that their repeated mortgage lending operations are actually highly leveraged speculation. Leverage is a double-edged sword: it can magnify gains in a bull market, but it will also multiply losses in a bear market.

The history of financial markets has repeatedly proven that extreme situations are bound to occur. Whether it's the 2008 global financial crisis, the March 2020 market crash, or the 2022 Luna crash, these so-called "black swan" events always strike when people least expect them. The fatal flaw of algorithmic stablecoins and highly leveraged strategies is that they are designed to bet that extreme situations won't occur. This is a losing bet.

Why do so many people continue to invest despite knowing the risks? Human greed, luck, and herd mentality may explain part of the story. In a bull market, continuous success can dull people's risk awareness. When everyone around them is making money, few can resist the temptation. But the market will always, at some point, harshly remind you: there is no free lunch.

For ordinary investors, how to survive in this turbulent ocean?

First, learn to identify risks. When a project promises a "stable" return exceeding 10%, when its mechanics are so complex you can't explain them to a layperson in a single sentence, when its primary purpose is to generate revenue rather than actual applications, when it lacks transparent and verifiable fiat currency reserves, and when it's being aggressively promoted on social media, alarm bells should go off.

The principles of risk management are simple yet timeless. Don't put all your eggs in one basket. Avoid using leverage, especially hidden, high-leverage strategies like revolving loans. Don't imagine you can escape before a crash; when Luna collapsed, 99% of investors were not spared.

The market is far smarter than any individual. Extreme situations are bound to occur. When everyone is chasing high returns, that's often when the risks are greatest. Remember the lesson of Luna, where $60 billion in market capitalization was wiped out in seven days, wiping out the savings of hundreds of thousands of people. Remember the panic of October 11th, where $280 billion evaporated in a matter of hours, leading to countless margin calls and liquidations. Next time, a story like this could happen to you.

Buffett said: "Only when the tide goes out do you discover who is swimming naked."

In a bull market, everyone seems like an investment genius, and a 50% return seems within easy reach. But when extreme conditions strike, we find ourselves already standing on the edge of a cliff. Algorithmic stablecoins and highly leveraged strategies have never been "stablecoin financial management" but rather high-risk speculative tools. A 50% return isn't a "free lunch," but rather bait on the edge of a cliff.

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