$20 billion liquidation storm review: USDe's "revolving loan" mechanism ignites double leverage, revealing how market makers became accomplices.

On October 11, 2025, the crypto market experienced the largest liquidation storm in history, with a total liquidation amount exceeding 20 billion USD across the entire network. Although former U.S. President Trump's tariff threats served as the macro trigger, its disastrous destructive power stemmed from the dual-leverage system constructed by the synthetic stablecoin USDe and its high-risk "circular borrowing" strategy. The high concentration and fragility of this system caused the price of USDe to decouple in a panic, triggering a chain reaction of forced deleveraging from on-chain DeFi protocols to centralized derivatives exchanges. This article will deeply analyze the transmission and amplification mechanisms of risk from the perspectives of large investors and market makers.

Resonance of Macroeconomic Shocks and Market Vulnerability

This market crash is not simply a result of external shock events, but rather the outcome of internal issues within the market combined with external catalysts.

· Trump Tariffs: Amplifier of Risk Aversion: Trump's announcement of a 100% tariff on Chinese goods quickly triggered global risk aversion. As the news was released after the closing of traditional financial markets in the U.S., the crypto market became the first concentrated outlet for global panic.

· Price Flash Crash and Liquidation Scale: Amid the spread of panic, the price of Bitcoin plummeted 15% from its intraday high, while Altcoins experienced even more severe flash crashes, with some tokens' prices dropping by 70% to 90% in a short period. Ultimately, the total amount of cryptocurrency contract liquidations across the network surpassed 20 billion USD, highlighting the astonishing scale of leverage within the market.

· Speculative Frenzy and Systemic Issues: Before the collapse, traders generally engaged in excessive speculation and used extremely high leverage in an attempt to catch the bottom. High-yield DeFi protocols represented by USDe rapidly emerged, offering ultra-high annual percentage yields (APY) that attracted a large amount of yield-chasing capital, establishing a complex and interconnected risk transmission chain among different financial instruments, putting the market in a highly volatile "powder keg" state.

USDe Mechanism: The Super Leverage Manufacturing Factory

As the world's third-largest stablecoin, the "synthetic" mechanism of USDe and its high-yield strategy are the core amplifying engines of this systemic risk.

· The high yield appeal of USDe: USDe is launched by Ethena Labs and is essentially a financial certificate. Its design differs from traditional dollar reserve stablecoins, as it maintains price stability through a "Delta neutral hedging" strategy: holding a long position in Ethereum spot while shorting an equivalent amount of Ethereum perpetual contracts on derivatives exchanges. Its base APY of 12% to 15% mainly comes from the funding rates of perpetual contracts.

· "Revolving Loan": The Ultimate Amplification of Yield: What truly pushes the risk to the extreme is the "Revolving Loan" (yield farming) strategy, which can amplify the annual yield to an astonishing 18% to 24%. Investors deposit USDe into the lending protocol as collateral, borrow stablecoins like USDC, and then exchange the borrowed stablecoins back to USDe for re-staking, repeating this process 4 to 5 times.

· Collateral Illusion and LTV Risk: Through this process, an initial capital of only $100,000 can leverage total positions exceeding $360,000. The core issue of this structure lies in "liquidity mismatch" and "collateral illusion": the massive TVL locked in DeFi protocols is repeatedly counted and exaggerated. Once the price of USDe experiences a slight decline (for example, 25%), it is enough to completely erode the initial margin, triggering liquidation and causing the entire leveraged pyramid to collapse instantly.

The Liquidation Journey of Large Investors: A Spiral Decline Under Dual Pressure

For Large Investors (whales), their high-leverage positions face dual liquidation pressure under macro shocks, becoming a key link in risk transmission.

· Vulnerabilities in the double-leverage structure: The mainstream strategy of large investors is to use their altcoin holdings as the first layer of collateral to borrow stablecoins without selling them, and then invest the stablecoins into the second layer "cyclical lending" of USDe. This structure exposes them to the dual risks of collateral volatility and USDe price fluctuations.

· LTV threshold alert: Tariff news triggered market sell-off, causing the value of altcoin assets used as collateral to plummet sharply, resulting in an increase in the LTV ratio of the first layer of leverage. Large investors received margin call notifications and must quickly replenish stablecoins or repay loans.

· USDe decoupling and on-chain liquidation outbreak: To meet margin requirements, Large Investors began to dismantle USDe circular positions, triggering huge selling pressure on USDe at the exchange. Due to insufficient liquidity, the price of USDe instantly decoupled, plunging to between 0.62 and 0.65 USD. The sharp decline in the price of USDe caused its value as collateral for the second layer of leverage to shrink instantly, directly triggering automatic liquidation within the lending protocol.

· The spot market is being retaliated against: the on-chain liquidation mechanism has begun to force the Large Investors to sell off the initially pledged altcoins in the spot market to repay debts, and this wave of selling pressure has directly impacted the already fragile Altcoins spot market, accelerating the spiral decline in prices.

Market Maker Failure: Unified Accounts and Liquidity Vacuum

Market Makers (MM) are originally providers of market liquidity, but their extreme pursuit of capital efficiency has made their "unified account" structure a collapsing vehicle for passive leverage during crises.

· The Temptation and Traps of Unified Accounts: Market makers commonly use the "Unified Account" provided by mainstream CEX or the full-margin model, treating all assets as unified collateral for their derivatives positions. They tend to use illiquid altcoins as core collateral to maximize capital efficiency.

· Collateral shock triggers passive leverage: When the price of the altcoin used as collateral plummets, the margin value of the market maker's account instantly shrinks significantly, passively doubling its effective leverage ratio (from 2x to over 4x), triggering the exchange's risk engine for liquidation.

· Liquidation and Inventory Sell-off: The exchange's liquidation engine is triggered, which not only liquidates collateral that has significantly depreciated in value but also forcibly sells any liquid assets in the market maker's account (such as BNSOL, WBETH spot) to cover margin gaps. At the same time, the liquidation bots will sell collateral on the spot market, further exacerbating the price decline and triggering a spiral liquidation event.

· Liquidity Vacuum: While the account is being liquidated, the automated system of the market maker executes risk management instructions: mass cancellation of thousands of buy orders on altcoin trading pairs, withdrawing liquidity. At the moment when the market selling pressure is the strongest, the market makers, who serve as the main buyers, suddenly disappear, causing a catastrophic "liquidity vacuum," perfectly explaining why altcoin prices can plummet by 80% to 90% in an instant.

Conclusion

The market crash on October 11, 2025, was a textbook example of cross-border systemic risk exposure in the history of crypto finance. It clearly revealed the "yield trap" of USDe circular lending in DeFi, the fragility of the "unified account" structure of CeFi exchanges, and how the blurred boundaries between the two create complex risk contagion paths. The profound lesson from this incident is that in the pursuit of extreme high returns and capital efficiency, hidden systemic risks are greatly amplified. For all market participants, respecting risk and avoiding excessive leverage are the most important survival rules in a bull market.

Note: This article is for informational purposes only and does not constitute any investment advice. The crypto market is highly volatile, and investors should make decisions with caution.