Major Market Cap Decline Following Flash Crash
Ethena Labs’ synthetic dollar token USDe has experienced a significant market cap reduction since the October 10 market crash. The token lost over $5 billion in market capitalization after what some are calling the “Black Friday” flash crash. Before the event, USDe’s market cap stood above $14.6 billion, but it has since dropped to around $9.2 billion.
The sharp decline represents about a 40% reduction in market cap, which is the largest drop since USDe launched in late 2023. The market cap fell by approximately $2 billion during October 10-11 alone as investors rushed to redeem their USDe tokens. Each redemption burns the returned USDe, which reduces the overall token supply and consequently lowers the market capitalization.
Redemption Volume and System Resilience
According to analysis posted in Ethena’s governance forum, approximately $1.9 billion in USDe redemptions were processed between October 10 and 11. Despite the massive redemption volume, the system processed these requests quickly. Blockworks analysts noted that Ethena’s mechanism demonstrated “extreme resilience” during this stress test.
The market cap continued to decline throughout October, losing another $3 billion after the initial crash. This brings the total reduction to over $5 billion from the pre-crash peak. The scale of redemptions suggests significant investor concern following the market volatility.
Binance Price Discrepancy and Criticism
The token came under increased scrutiny after October 10 when its price on Binance briefly plunged to about $0.65. This dramatic price crash below the $1 peg didn’t occur on other platforms. On decentralized protocols like Curve Finance, USDe’s price remained close to its $1 peg during the market volatility.
The price discrepancy on Binance led to a wave of liquidations on the exchange and widespread criticism of Binance’s pricing oracle setup. In response, Binance published a blog post on October 12 distancing itself from these accusations, stating that its core futures and spot matching engines and API trading “remained operational” during the crash.
Potential Factors Behind the Decline
Sam MacPherson, CEO and co-founder of Phoenix Labs, suggested that part of USDe’s decline could be linked to excessive leverage. He noted that the token had become “over-leveraged at 15 billion” and that the “more organic size for USDe is around 6-7 billion.” MacPherson wrote that when the market turned, it was “always going to reflexively drop to the organic size.”
Interestingly, just before the crash, USDe deposits on Binance had surged to $735 million after the exchange began offering 12% APR on USDe through its Binance Earn product. The timing suggests that rapid growth may have contributed to the token’s vulnerability during market stress.
The Defiant reached out to Ethena Labs for comment on the market cap shift but hadn’t received a response by press time. The event serves as a significant stress test for synthetic dollar protocols and highlights the challenges of maintaining stability during extreme market conditions.
