Is this the real reason behind the $20 billion liquidation in the crypto market?

October 11, 2025, was 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 suffered an even more severe drop of 16%. Panic spread through the market like a virus, with many altcoins crashing 80–90% in an instant. Even after a slight rebound, most still fell by 20% to 30%.

In just a few hours, hundreds of billions of dollars in global crypto market capitalization evaporated.

On social media, cries of anguish echoed everywhere, with voices from around the world joining in a collective lament. But beneath the surface panic, the real transmission chain was far more complex than it appeared.

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

On October 10, U.S. President Trump announced via his social media that starting November 1, all imported goods from China would be subject to an additional 100% tariff. The wording of this message was exceptionally tough. He wrote that China-U.S. relations had deteriorated to the point where there was "no need to meet," and that the U.S. would retaliate through financial and trade means, justifying this new tariff war by citing China's monopoly on rare earths.

After the news broke, global markets instantly lost balance. The Nasdaq plunged 3.56%, marking a rare single-day drop in recent years. The U.S. Dollar Index fell 0.57%, crude oil plummeted 4%, and copper prices dropped in tandem. Global capital markets fell into a panic-driven sell-off.

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

This localized liquidity crisis quickly spread, with a large number of investors using USDe for loop lending being liquidated, and USDe's price began to depeg across all platforms.

Even more seriously, many market makers also used USDe as contract margin. When USDe's value was nearly halved in a short period, their leveraged positions were passively doubled. Even what seemed like a safe 1x long position could not escape liquidation. The double whammy of small-cap token contracts and USDe's price caused market makers to suffer heavy losses.

How Did the Dominoes of "Loop Lending" Fall?

The Temptation of 50% APY

USDe, launched by Ethena Labs, is a "synthetic dollar" stablecoin. With a market cap of about $14 billion, it has become the world's third-largest stablecoin. Unlike USDT or USDC, USDe does not have an equivalent dollar reserve. Instead, it relies on a strategy called "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 hedging to offset volatility.

So, what attracted the flood of capital? The answer is simple: high returns.

Staking USDe itself yields an annualized return of about 12% to 15%, derived from the funding rate of perpetual contracts. In addition, Ethena has partnered with multiple lending protocols to provide extra incentives for USDe deposits.

What truly caused yields to skyrocket was "loop lending." Investors repeatedly operated within lending protocols: collateralizing USDe, borrowing other stablecoins, exchanging them back into USDe, and depositing again. After several rounds, the principal was magnified nearly fourfold, and annualized returns rose to the 40%–50% range.

In the traditional financial world, a 10% annualized return is already rare. The 50% yield offered by USDe loop lending was almost irresistible for profit-seeking capital. As a result, funds poured in, and the USDe deposit pools in lending protocols were often "maxed out." Whenever new capacity was released, it was instantly snapped up.

The Depegging of USDe

Trump's tariff remarks triggered global market panic, and the crypto market entered "risk-off mode." Ethereum plunged 16% in a short time, directly shaking the balance USDe relied on. But what truly triggered USDe's depegging was the liquidation of a large institution on Binance.

Crypto investor and Primitive Ventures co-founder Dovey speculated that the real trigger was the liquidation of a large institution using cross-margin mode on Binance (possibly a traditional trading firm using cross-margin). 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 as low as $0.6.

USDe's stability originally depended on two key conditions. First, a positive funding rate—meaning in a bull market, short sellers pay fees to long holders, and the protocol profits. Second, sufficient market liquidity to ensure users could always redeem USDe at close to $1.

But on October 11, both conditions collapsed simultaneously. Market panic caused short sentiment to surge, and the funding rate for perpetual contracts quickly turned negative. The protocol's large short positions, which previously earned fees, now had to pay them, directly eroding collateral value.

Once USDe began to depeg, market confidence quickly collapsed. More people joined the sell-off, the price continued to fall, and a vicious cycle took hold.

The Liquidation Spiral of Loop Lending

In lending protocols, when the value of a user's collateral drops to a certain level, smart contracts automatically trigger liquidation, forcibly selling the user's collateral to repay their debt. When USDe's price fell, the health of highly leveraged loop lending positions quickly dropped below the liquidation threshold.

The liquidation spiral thus began.

Smart contracts automatically sold the liquidated users' USDe on the market to repay their borrowed debt. This further increased the selling pressure on USDe, causing its price to fall even more. The price drop then triggered more loop lending position liquidations—a classic "death spiral."

Many investors may not have realized until the moment of liquidation that their so-called "stablecoin wealth management" was actually a high-leverage gamble. They thought they were just earning interest, but didn't realize that loop lending had multiplied their risk exposure several times. When USDe's price fluctuated violently, even those who considered themselves conservative investors could not escape liquidation.

Market Maker Liquidations and Market Collapse

Market makers are the "lubricants" of the market, responsible for placing orders and matching trades to provide liquidity for various crypto assets. Many market makers also used USDe as margin on exchanges. When USDe's value plummeted in a short time, the value of these market makers' margin also shrank sharply, causing their positions on exchanges to be forcibly liquidated.

Statistics show that this crypto market crash resulted in liquidation volumes of tens of billions of dollars. Notably, most of this amount did not come solely from retail speculative positions, but also from a large number of institutional market makers' and arbitrageurs' hedged positions. In the USDe case, these professional institutions originally used sophisticated hedging strategies to avoid risk, but when USDe—considered a "stable" margin asset—suddenly crashed, all risk control models failed.

On derivatives trading platforms like Hyperliquid, a large number of users were liquidated, and the platform's HLP (liquidity provider vault) holders made a 40% profit overnight, with profits soaring from $80 million to $120 million. This figure indirectly demonstrates the massive scale of the liquidations.

When market makers are collectively liquidated, the consequences are catastrophic. Market liquidity is instantly drained, and bid-ask spreads widen sharply. For small-cap, already illiquid altcoins, this means that prices collapse even faster on top of the broad market decline due to lack of liquidity. The entire market falls into panic selling, and a crisis triggered by a single stablecoin ultimately evolves into a systemic collapse of the entire market ecosystem.

The Echoes of History: The Shadow of Luna

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

The core of the Luna incident was an algorithmic stablecoin called UST. It promised annualized returns of up to 20%, attracting tens of billions of dollars in capital. But its stability mechanism relied entirely on market confidence in another token, LUNA. When UST depegged due to massive sell-offs, confidence collapsed, the arbitrage mechanism failed, and LUNA tokens were minted without limit. The price fell from $119 to less than $0.0001, wiping out about $60 billion in market cap.

Comparing the USDe incident with Luna, we see striking similarities. Both used yields far above the norm as bait to attract large amounts of capital seeking stable returns. Both exposed the fragility of their mechanisms under extreme market conditions, and both ultimately fell into a "death spiral" of falling prices, collapsing confidence, forced liquidations, and further price drops.

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

Of course, there are some differences. Luna was a purely algorithmic stablecoin with no external asset collateral. USDe, on the other hand, is over-collateralized with crypto assets like Ethereum. This gives USDe greater resilience in a crisis, which is why it did not go to zero like Luna.

Additionally, after the Luna incident, global regulators issued red flags for algorithmic stablecoins, meaning USDe has lived under stricter regulatory scrutiny since its inception.

However, it seems not everyone has learned from history. After Luna's collapse, many swore they would "never touch algorithmic stablecoins again." Yet just three years later, faced with USDe loop lending's 50% annualized returns, people once again forgot about risk.

Even more alarming, this incident exposed not only the fragility of algorithmic stablecoins, but also the systemic risks of institutional investors and exchanges. From Luna's blowup to the FTX collapse, from the chain liquidations of small and medium-sized exchanges to the SOL ecosystem crisis, this path was already trodden in 2022. But three years later, large institutions using cross-margin still used high-risk assets like USDe as collateral, ultimately triggering a chain reaction amid market volatility.

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

Respect the Market

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

USDT or USDC can only offer relatively low annualized returns because they are backed by real dollar reserves and have extremely low risk. USDe can offer 12% returns because it bears the potential risk of the delta-neutral hedging strategy under extreme conditions. The reason USDe loop lending can offer 50% returns is that it stacks four times the leverage risk on top of the base yield.

If someone promises you "low risk, high return," they are either a scammer or you haven't yet understood where the risk lies. The danger of loop lending is in its hidden leverage. Many investors do not realize that their repeated collateralized borrowing is actually a high-leverage speculative activity. Leverage is a double-edged sword: it can amplify your gains in a bull market, but it will also double your losses in a bear market.

History has repeatedly proven that extreme events will happen. Whether it was the 2008 global financial crisis, the market crash of March 2020, or the Luna collapse of 2022, these so-called "black swan" events always arrive when people least expect them. The fatal flaw of algorithmic stablecoins and high-leverage strategies is that their very design is a bet that extreme events won't happen. It's a game destined to lose.

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

So how can ordinary investors survive in these turbulent waters?

First, learn to identify risk. When a project promises more than 10% "stable" returns, when its mechanism is so complex you can't explain it to a layperson in one sentence, when its main use is to earn yield rather than for real applications, when it lacks transparent, verifiable fiat reserves, and when it is being hyped on social media, you should be on high alert.

The principles of risk management are simple and timeless. Don't put all your eggs in one basket. Don't use leverage, especially hidden high-leverage strategies like loop lending. Don't fantasize that you can get out before a crash—when Luna collapsed, 99% of people didn't make it out in time.

The market is far smarter than any individual. Extreme events will happen. When everyone is chasing high returns, that's often when risk is greatest. Remember the lesson of Luna: $60 billion in market cap went to zero in seven days, and hundreds of thousands of people's savings vanished. Remember the panic of October 11: $280 billion evaporated in hours, and countless people were liquidated. Next time, this story could 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 50% returns seem within reach. But when extreme events happen, you realize you've been standing on the edge of a cliff all along. Algorithmic stablecoins and high-leverage strategies have never been "stablecoin wealth management"—they are high-risk speculative tools. The 50% return is not a "free lunch," but bait on the edge of a cliff.

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