Is This the Real Reason Behind the $20 Billion Crypto Liquidation?

October 11, 2025, was a nightmare for crypto investors worldwide.

Bitcoin plunged from its $117,000 peak, dropping below $110,000 within hours. Ethereum suffered an even steeper loss, plummeting 16%. Market panic spread rapidly: numerous altcoins crashed 80–90% in an instant, and even after brief rebounds, most still ended the day down 20%–30%.

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

Social media erupted with anguish, as voices in every language mourned a shared disaster. But beneath the surface panic, the real contagion chain was far more intricate than it seemed.

This crash began with a single statement from Trump.

On October 10, U.S. President Trump announced via social media that, starting November 1, the United States would impose an additional 100% tariff on all imported goods from China. The language was strikingly tough: Trump declared that U.S.-China relations had deteriorated to a point where “no meetings are necessary.” The U.S. would retaliate through financial and trade measures, citing China’s rare earth monopoly to justify this new tariff war.

The announcement instantly destabilized global markets. The Nasdaq plunged 3.56%, marking one of the sharpest single-day declines in recent years. The U.S. Dollar Index fell 0.57%, crude oil dropped 4%, and copper prices tumbled as well. Capital markets worldwide descended into a wave of panic selling.

Amid this significant market event, the prominent stablecoin USDe became one of the biggest victims. Its de-pegged status, along with the collapse of the high-leverage Loop Lending systems built around it, played out within hours.

This localized liquidity crisis spread rapidly. Many investors using USDe for Loop Lending faced liquidation as USDe prices lost their peg across multiple platforms.

More troubling still, a number of market makers had also posted USDe as contract collateral. As USDe’s value was nearly cut in half in a short time, their leverage effectively doubled, and even positions with seemingly safe 1x leverage were not spared. The double blow from crashing altcoin contracts and USDe’s price left market makers facing severe losses.

How Did the Loop Lending Dominoes Collapse?

The Lure of 50% APY

USDe, developed by Ethena Labs, is a “synthetic dollar” stablecoin. With a market capitalization of around $14 billion, it has become the world’s third-largest stablecoin. Unlike USDT or USDC, USDe does not maintain dollar reserves; instead, it uses a “delta-neutral hedging” strategy to stabilize its price. The protocol holds spot Ethereum while shorting an equivalent amount of perpetual ETH contracts on derivatives exchanges, mitigating volatility through delta-neutral positions.

So, what drove the flood of capital? The answer is straightforward: high yields.

Staking USDe could earn about 12%–15% annualized returns, generated from perpetual funding rates. Beyond that, Ethena partnered with various lending protocols to offer additional rewards for USDe deposits.

The real yield surge came from Loop Lending. Investors would repeatedly pledge USDe, borrow other stablecoins, convert them to USDe, and redeposit, compounding their principal nearly fourfold and driving annualized yields into the 40%–50% range.

In traditional finance, a 10% annual yield is already rare. The 50% returns offered by USDe Loop Lending were nearly irresistible to yield-hungry capital. Money kept pouring in, and USDe pools on lending protocols were frequently fully allocated. Whenever new capacity opened, it was instantly snapped up.

USDe’s Depeg

Trump’s tariff rhetoric sparked global panic, pushing crypto markets into “risk-off” mode. Ethereum’s 16% crash in a short period directly upended USDe’s delicate balance. But the real spark for USDe’s de-pegged status was the liquidation of a major player on Binance.

Crypto investor and Primitive Ventures co-founder Dovey speculated that the true trigger was the forced liquidation of a large institution using Cross-Margin Mode on Binance—likely a traditional trading firm. This institution had posted USDe as Cross-Margin Collateral, and when market volatility soared, the liquidation engine auto-sold USDe to cover debts, causing its price on Binance to plunge to $0.60.

USDe’s stability originally relied on two key factors. First, positive funding rates: in bull markets, short sellers pay long holders, generating protocol profits. Second, ample market liquidity, ensuring users could always redeem USDe at nearly $1.

On October 11, both pillars collapsed. Panic fueled a surge in bearish sentiment, and perpetual funding rates quickly turned negative. The protocol’s large short positions flipped from earning fees to paying them, eroding collateral value.

As soon as USDe began to lose its peg, market confidence unraveled. More investors joined the sell-off, prices plunged further, and the vicious cycle was locked in—a complete feedback loop.

The Liquidation Spiral of Loop Lending

In lending protocols, when a user’s collateral value falls below a certain threshold, smart contracts auto-trigger liquidation, forcibly selling the collateral to repay debt. As USDe’s price dropped, the health of high-leverage Loop Lending positions quickly breached liquidation thresholds.

The liquidation spiral began.

Smart contracts dumped liquidated users’ USDe to repay borrowed debt, adding to the selling pressure and driving USDe’s price lower still. The downward spiral triggered even more Loop Lending liquidations—a textbook “death spiral.”

Many investors didn’t realize until liquidation that their so-called “stablecoin investing” was actually a high-leverage gamble. They thought they were just earning interest, not recognizing how Loop Lending had multiplied their risk exposure. When USDe’s price swung violently, investors who considered themselves conservative could not escape liquidation.

Market Maker Liquidations and Market Meltdown

Market makers provide liquidity for various crypto assets. Many market makers also posted USDe as margin on exchanges. As USDe’s value crashed, their margin value collapsed as well, leading to forced liquidations on exchange positions.

Data shows this crypto crash triggered liquidations totaling hundreds of billions of dollars. Crucially, most of these losses didn’t come from retail speculators alone, but from institutional market makers and arbitrageurs’ hedged positions. In USDe’s case, these professionals used sophisticated hedging strategies to manage risk, but when USDe—their “stable” collateral—collapsed, every risk model failed.

On derivatives platforms like Hyperliquid, massive numbers of users were liquidated. Holders of the platform’s HLP (liquidity provider vault) saw profits jump 40% overnight, soaring from $80 million to $120 million—testament to the scale of the wipeout.

When market makers are liquidated en masse, the effects are disastrous. Market liquidity vanishes instantly, and bid-ask spreads widen sharply. For smaller, illiquid altcoins, this meant prices collapsed even faster. Panic selling gripped the market—a crisis sparked by a single stablecoin ultimately triggered a systemic meltdown across the entire ecosystem.

Echoes of History: Luna’s Shadow

For those who endured the 2022 bear market, this felt like déjà vu. In May that year, the Luna crypto empire collapsed in just seven days.

The heart of the Luna crisis was the algorithmic stablecoin UST, which promised as much as 20% annual yield and attracted billions of dollars. Its stability mechanism depended entirely on confidence in another token, LUNA. When UST de-pegged under massive selling, confidence evaporated, the arbitrage mechanism failed, and LUNA went into hyperinflation—its price plunged from $119 to less than $0.0001, wiping out nearly $60 billion in value.

Set side by side, the USDe and Luna crises reveal striking similarities. Both used exceptionally high yields to lure capital seeking stable returns. Both exposed the fragility of their mechanisms in extreme markets, and both spiraled into a cycle of “price decline, confidence collapse, forced liquidation, further price decline.”

Each began as a single-asset crisis and escalated into systemic risk for the broader market.

Key differences remain. Luna was a purely algorithmic stablecoin, with no external collateral. USDe is overcollateralized by crypto assets like Ethereum, providing more resilience—hence it didn’t go to zero like Luna.

Moreover, after Luna’s collapse, global regulators cracked down on algorithmic stablecoins, putting USDe under far stricter regulatory scrutiny from the start.

Still, history’s lessons fade quickly. After Luna’s fall, many swore off algorithmic stablecoins for good. Yet only three years later, the 50% returns from USDe Loop Lending tempted investors to once again ignore the risks.

Even more concerning, this incident exposed not only the fragility of algorithmic stablecoins, but also systemic risks among institutional investors and exchanges. From Luna’s implosion to FTX’s collapse, from cascading liquidations at smaller exchanges to the SOL ecosystem’s crisis, this path was already trodden in 2022. Yet three years later, major institutions continued using high-risk assets like USDe as Cross-Margin Collateral, triggering chain reactions amid market volatility.

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

Respect the Market

Financial markets have an immutable law: risk and return are always proportional.

USDT and USDC only provide modest yields because they’re backed by real dollar reserves and carry minimal risk. USDe’s 12% yield comes from taking on the structural risks of delta-neutral hedging in extreme scenarios. The 50% yield from USDe Loop Lending is made possible by stacking fourfold leverage on top of base returns.

If someone promises “low risk, high return,” they’re either misleading you or you don’t understand the risk. The danger of Loop Lending lies in its hidden leverage. Many investors are unaware that continual borrowing and redepositing is actually high-leverage speculation. Leverage is a double-edged sword: it amplifies gains in a bull market, but will compound losses in a downturn.

History shows time and again that extreme events do happen. From the 2008 global financial crisis to the March 2020 crash and the Luna implosion in 2022, so-called “black swan” events always arrive when least expected. The fatal flaw in algorithmic stablecoins and high-leverage strategies is that they’re built on the assumption that extremes won’t occur—a losing bet by design.

So why do so many plunge in, despite the risks? Human greed, overconfidence, and herd mentality play their part. In bull markets, repeated success numbs the sense of risk. When everyone is making money, few can resist the temptation. Yet the market always finds a way to deliver a harsh reminder: there’s no such thing as a free lunch.

How can ordinary investors survive the storm?

Start by identifying risk. If a project promises over 10% “stable” returns, if its mechanism is too complex to explain in a sentence, if its main use is yield farming rather than real-world application, if it lacks transparent, verifiable fiat reserves, or if it’s being hyped on social media, your warning lights should go off.

The principles of risk management are simple and enduring. Don’t put all your eggs in one basket. Don’t use leverage—especially high-risk, hidden leverage like Loop Lending. Don’t kid yourself that you’ll escape before a crash; in the Luna collapse, 99% failed to get out in time.

The market is always smarter than any individual. Extreme events will happen. When everyone chases high yields, risk is often at its peak. Remember Luna’s lesson: $60 billion in value vanished in a week, wiping out hundreds of thousands of investors. Remember October 11: $280 billion evaporated in hours, with countless forced liquidations. Next time, you could be the one caught in the storm.

Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

In a bull market, everyone looks like a genius, and 50% returns seem within easy reach. But when catastrophe strikes, you realize you’ve been standing on the edge all along. Algorithmic stablecoins and high-leverage strategies are not “stablecoin investing”—they’re high-risk bets. That 50% yield is not a free lunch.

In financial markets, survival always matters more than profit.

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