USDX is a synthetic stablecoin issued by Stables Labs that employs a Delta-neutral strategy. On November 6, it suddenly depegged significantly, plummeting from $1 to below $0.60, a drop of over 40%. The catalyst for this event was the abnormal operations of an address directly associated with the project's founder, Flex Yang—ignoring annual borrowing rates as high as 800%, this address frantically borrowed all available stablecoins (such as USDT, USDC, USD1, etc.) using USDX and sUSDX as collateral on DeFi platforms like Euler and Lista DAO, and immediately transferred them to centralized exchanges like Binance. Once there were no more assets to borrow, this address began to sell off large amounts of USDX for USDT on PancakeSwap, triggering market panic with this reckless "escape" behavior.
The USDX depegging event exposed the structural risks of synthetic stablecoins—its Delta-neutral strategy is executed off-chain on centralized exchanges, creating an opaque "black box" operation, and the expansion of the strategy to altcoins further amplified the risks. Unlike the previous USDe, which quickly recovered after a brief depegging, USDX lacks transparent reserve proof and third-party audits, and the project team has yet to provide a clear explanation for the depegging. This incident once again demonstrates that in the complex environment of DeFi, where protocols are nested and leverage is compounded, stablecoin projects lacking transparency and regulatory compliance are prone to trust crises during extreme market conditions, ultimately leading to insolvency and user fund losses.
Analysis of the Reasons for USDX Stablecoin's Depegging
Direct Trigger Factors
Abnormal Operations of Founder-Associated Address: The wallet address directly associated with Stables Labs founder Flex Yang (starting with 0x50de) began to exhibit clear "escape" behavior in late October. This address had been receiving USDT transferred from an address starting with 0x246a (directly marked as Flex Yang by Arkham) since late July and transferring it to Binance. More critically, this address ignored annual borrowing rates as high as 800%, frantically borrowing stablecoins (such as USDT, USDC, USD1, etc.) on multiple DeFi platforms like Euler, Lista DAO, and Silo, and immediately transferring them to centralized exchanges like Binance. When there were no more assets to borrow, this address began to sell off large amounts of USDX for USDT on PancakeSwap, directly triggering market panic. This behavior clearly contradicts normal business logic—no rational investor would be willing to pay such high borrowing costs unless facing an urgent liquidity crisis.
Market Liquidity Exhaustion and Chain Reaction: The abnormal operations led to the depletion of all assets that could be used as collateral with USDX/sUSDX in the DeFi market, including USDT, YUSD, and USD1 in the Re7 Labs Cluster on Euler, and even WBNB and BTCB were borrowed out. The borrowing rate for the sUSDX collateralized USDT vault on Lista DAO skyrocketed to over 800%, and if borrowers continued to default, this rate would keep rising until forced liquidation. The USDX liquidity pools on DEXs like PancakeSwap experienced severe imbalances; although the multi-signature address of Stables Labs added $10 million back after removing nearly $20 million in liquidity two days prior, it could not stop the spread of the liquidity crisis. Large sell orders generated significant slippage due to insufficient liquidity, further accelerating the depegging process.
Fundamental Structural Issues
Inherent Flaws and Risk Amplification of Delta-Neutral Strategy: USDX employs a Delta-neutral hedging strategy similar to Ethena, but extends the strategy's scope from Bitcoin and Ethereum to altcoins. While this approach can amplify returns in a bull market, it also significantly increases risk exposure. In extreme market conditions, such as the "10.11 crash," this strategy is prone to ADL (automatic deleveraging) or hedging failure, leading to losses in collateral assets. As demonstrated by the xUSD explosion case, the Delta-neutral strategy can cause collateral asset losses due to ADL in extreme conditions, accumulating risks by entrusting funds to third parties for off-chain operations and using circular leverage strategies, which ultimately exploded after third-party losses approached $100 million. The problem with USDX is that it not only inherits the inherent risks of this strategy but also amplifies the risk factor by extending it to altcoins.
Opaque "Black Box" Operations and Information Asymmetry: The hedging strategy of USDX is primarily executed off-chain on centralized exchanges, creating severe information asymmetry. Although the official website claims there are still over $680 million in reserve assets (with Binance accounting for the majority), the opacity of centralized exchanges makes it impossible to verify the authenticity of this data. In stark contrast to Ethena's USDe, which regularly discloses third-party reserve proof and maintains a collateralization rate above 120%, USDX lacks a regular third-party audit and real-time reserve proof mechanism. This "black box" operation model means that no one besides the project team knows the actual asset status and hedging effectiveness, and when the market experiences anomalies, investors can only rely on speculation and panic to make decisions.
Defects in Governance Structure and Failure of Risk Control System: Stables Labs' governance structure has obvious flaws, as the project team entrusts a large amount of funds to third parties for off-chain operations but lacks effective supervision and risk control mechanisms. While using circular leverage strategies can improve capital efficiency under normal market conditions, it can also amplify losses in extreme situations. When third-party operations incur losses, these risks quickly transmit throughout the entire system. More seriously, key decisions of the project seem to be highly centralized in the hands of the founder, and when the founder-associated address begins abnormal operations, the entire project's credibility and stability suffer a fatal blow. This centralized governance structure contradicts the principles of decentralized finance and lacks effective checks and balances.
Systemic Risk Factors
Complex Nesting of DeFi Protocols and Risk Transmission: USDX is widely used as collateral in DeFi protocols, forming a complex risk transmission network with multiple protocols. Notably, Re7 Capital and MEV Capital simultaneously established markets for both USDX and the previously exploded xUSD, indicating that when one project encounters problems, risks can quickly transmit to related projects. The leverage stacking between protocols makes it difficult to accurately assess the true risk exposure; for example, crvUSD can use a stablecoin issued with crvUSD as the underlying asset to issue crvUSD, creating a complex nested structure that makes it challenging to determine how many layers of leverage a foundational asset has, even when all information is publicly available on-chain. When USDX begins to depeg, all DeFi strategies and lending positions using it as collateral are impacted, creating a systemic chain reaction.
Market Confidence Crisis and Panic Contagion: In the context of xUSD's recent explosion due to the failure of the Delta-neutral strategy, the market already had a trust crisis regarding stablecoins employing similar models. The USDX depegging event occurred during an extremely sensitive time window, with investors' awareness of the risks associated with such "synthetic stablecoins" significantly heightened. The abnormal behavior of the founder-associated address further exacerbated market panic, especially when the market discovered that Flex Yang was not only the founder of Stables Labs but also a former founder of Babel Finance and HOPE, with historical negative records amplifying the trust crisis. The project team has lacked timely and transparent crisis communication and has yet to provide a clear explanation, allowing the confidence crisis to continue to fester and spread throughout the entire DeFi ecosystem.
Regulatory Environment and Compliance Risks: Compared to traditional stablecoins like USDT and USDC, synthetic stablecoins like USDX face significant disadvantages in regulatory compliance. Traditional stablecoin issuers like Circle actively embrace regulation, regularly undergo audits, and disclose reserve asset compositions, which helps them build a good reputation among institutional investors. Although USDX claims to be a stablecoin issuer compliant with MiCA regulations, its actual operational model is far from traditional stablecoins, resembling more of a structured financial product. In an increasingly stringent regulatory environment, this ambiguous positioning increases the project's compliance risks and limits its acceptance in the institutional market.
Market Microstructure Analysis
Liquidity Provision Mechanism and Incentive Imbalance: The liquidity of USDX on various DEXs primarily relies on the project team's provision and participation from external liquidity providers. When the market experiences anomalies, external liquidity providers often withdraw liquidity quickly to avoid losses, leading to a sharp contraction in liquidity. Although the project team attempts to stabilize prices by adjusting liquidity, such efforts are often insufficient in the face of large-scale sell-offs. The design flaws in the liquidity incentive mechanism mean that liquidity is most scarce when it is most needed, creating a vicious cycle.
Arbitrage Mechanism Failure and Price Discovery Distortion: Normally, when USDX deviates from its pegged price, arbitrageurs would profit by buying low-priced USDX and redeeming it for an equivalent amount of dollars, helping to bring the price back. However, when the market questions the underlying assets of USDX, arbitrageurs are concerned that the redemption mechanism may fail, leading them to refrain from participating in arbitrage activities. This results in a failure of the normal price discovery mechanism, with USDX's price reflecting market panic rather than its intrinsic value. The abnormal operations of the founder-associated address further distort price signals, making it difficult for the market to accurately assess USDX's true value.
What is a Delta-Neutral Stablecoin
Definition of Delta-Neutral Stablecoin
A Delta-neutral stablecoin is an innovative stablecoin based on a Decentralized Reserve Protocol (DRP) that maintains value stability through a Delta-neutral hedging strategy. The core idea is to ensure that the overall value of the reserve pool is unaffected by the price fluctuations of the underlying assets, thereby guaranteeing a 1:1 peg of the stablecoin to the US dollar and addressing the reserve insufficiency issues caused by collateral price volatility in traditional DRP stablecoins.
Operational Mechanism: Triple Yield Combination
The Delta-neutral stablecoin adopts a "triple yield source" model: holding spot crypto assets like BTC/ETH, simultaneously shorting an equivalent amount of coin-based perpetual contracts, and obtaining on-chain stable yields through staking and other means. By offsetting the +1 Delta of the spot with the -1 Delta of the short perpetual contracts, the overall investment portfolio achieves Delta=0, ensuring that regardless of how the prices of crypto assets fluctuate, the dollar value of the reserve pool remains stable.
Core Profit Mechanism: Funding Rate Arbitrage
The core profit source of Delta-neutral stablecoins is "funding rate arbitrage," a mechanism unique to perpetual contracts. When the number of long positions in the market exceeds the number of short positions, longs must pay funding rates to shorts to maintain the balance between spot prices and contract prices, and historical data shows that funding rates are positive most of the time. Statistical validation indicates that this strategy can achieve stable annual returns of 7%-10% across all historical years, providing an additional income source for stablecoin holders.
Two Main Implementation Routes
Route One: Direct Hedging Model (UXD, Pika, Ethena, USDX)
The direct hedging model is the most intuitive way to achieve Delta neutrality, with the protocol acting as a professional arbitrage trader. When users mint stablecoins, the protocol uses the received funds to purchase an equivalent amount of crypto asset spot (such as BTC, ETH) while simultaneously opening an equivalent short perpetual contract position on centralized or decentralized derivatives exchanges, forming a perfect Delta-neutral combination. For example, in Ethena, when a user deposits 1000 USDC, the protocol purchases $1000 worth of ETH spot and opens an equivalent short contract. Regardless of whether the ETH price rises or falls, the gains from the spot and the losses from the contract completely offset each other, but the protocol can continuously earn funding rate income to distribute to users. The advantage of this model lies in its simple and transparent mechanism, making it easy for users to understand, but the challenge is the need for a professional risk management team, and the hedging operations primarily rely on external exchanges, which carry counterparty risk and ADL (automatic deleveraging) risk.
Route Two: Built-in Derivatives Market Model (Angle Protocol, Liquity V2)
The built-in derivatives market model is more complex and innovative, as the protocol itself is a derivatives trading platform that does not rely on external exchanges for hedging. Users can open long positions within the protocol to gain price exposure, while the protocol naturally forms short positions as the counterparty, thus achieving overall Delta neutrality. For instance, in Angle Protocol, when users want to gain exposure to BTC prices, they deposit collateral into the protocol and open long contracts. The collateral collected by the protocol supports the issuance of stablecoins, while the short risk taken on by the protocol is hedged through the losses of the users' long positions—when the BTC price drops, the collateral lost by long users replenishes the protocol's reserves, maintaining the stability of the stablecoin. The advantages of this model include complete decentralization, independence from external exchanges, and better composability, but the challenges lie in the need for sufficient user participation to form a balanced long-short ratio, and the protocol's design complexity requires precise risk parameter adjustment mechanisms.
Advantages and Disadvantages of Delta-Neutral Stablecoins
Main Advantages
High Yield: The greatest advantage of Delta-neutral stablecoins is their ability to provide stable returns to holders. Through funding rate arbitrage, historical data shows that annual returns can reach 7%-15%, far exceeding the 0% returns of traditional stablecoins and bank deposit rates. For example, Ethena's USDe can achieve annual returns of over 20% during bull markets, providing DeFi users with an attractive source of passive income.
High Capital Efficiency: Compared to CDP models like MakerDAO, which require 150%-200% over-collateralization, Delta-neutral stablecoins can theoretically achieve a collateralization rate of 1:1 or close to it, significantly improving capital utilization efficiency. Users can obtain stablecoins without locking up large amounts of excess assets, freeing up more liquidity for other DeFi activities.
Degree of Decentralization: Especially in the built-in derivatives market model, which operates entirely on-chain and does not rely on centralized institutions for issuance or redemption, it aligns with the core principles of DeFi decentralization. Users can participate without KYC or geographical restrictions, enjoying true financial freedom.
Main Disadvantages
Complex Risk Exposure: Delta-neutral stablecoins face multiple complex risks. The most significant is the ADL (automatic deleveraging) risk, where exchanges may force liquidation under extreme market conditions, leading to hedging failure; while the risk of funding rate reversal, though rare, can result in sustained losses; additionally, there are liquidity risks, basis risks, operational risks, etc. The USDX depegging event is a typical case of these risks compounding.
Centralization Dependence: The direct hedging model heavily relies on centralized exchanges to execute hedging operations, exposing it to counterparty risk, regulatory risk, and single point of failure risk. If a major hedging platform encounters issues (such as the collapse of FTX), it could lead to the failure of the entire Delta-neutral mechanism. Even the decentralized built-in derivatives model often requires external dependencies like oracles.
Liquidity and Scale Limitations: The scale of Delta-neutral stablecoins is limited by the liquidity of the derivatives market. As project scale grows, larger short positions need to be opened in the derivatives market, but market capacity is limited, which may lead to increased slippage and higher hedging costs. Furthermore, in extreme market conditions, the exhaustion of liquidity in the derivatives market may prevent normal execution of hedging operations.
Governance and Transparency Risks: The complexity of the Delta-neutral strategy makes it difficult for ordinary users to understand and monitor the protocol's operational status. Key decisions regarding risk parameter settings and hedging strategy adjustments are often controlled by a few team members, leading to governance centralization risks. Additionally, especially in the direct hedging model, most operations occur off-chain, lacking real-time transparency.
Instability of Returns: Although funding rates have historically been mostly positive, they can be quite volatile and may turn negative for extended periods. In bear markets or when market sentiment is extremely pessimistic, funding rates may turn negative, leading to losses rather than gains from the Delta-neutral strategy, affecting the sustainability of the stablecoin.
Main Projects of Delta-Neutral Stablecoins
Market capitalization above $50 million
Insights on USDX Stablecoin Operations and Innovations
Given that USDX had a positive market response in the early stages and was relatively active in ecological cooperation and multi-chain expansion, there are certain takeaways in operations, maintenance, and innovation, which can be explored in the following aspects.
- Stability maintenance and risk management
- Multi-chain expansion and liquidity optimization
- Revenue-sharing incentive mechanisms
- Ecological bridging and community-driven initiatives
Conclusion
The USDX depegging crisis is not merely an isolated project failure case but a concentrated reflection of the structural challenges facing the entire Delta-neutral stablecoin sector. From the perspective of direct triggering factors, the abnormal operations of the founder-associated address exposed the centralization flaws in project governance and the failure of the risk control system; from the fundamental cause analysis, the inherent complex risk exposure of the Delta-neutral strategy, the opaque off-chain operation model, and the complex nested relationships between DeFi protocols collectively form a fragile risk transmission network. Especially during the sensitive period right after the xUSD explosion, the market's trust foundation in such "synthetic stablecoins" was already weak, and the USDX event further intensified investors' doubts about the entire Delta-neutral stablecoin model. This incident once again proves that in the pursuit of high returns, the lack of transparency, decentralized governance, and effective risk control mechanisms ultimately leads to a systemic trust crisis.
Despite facing numerous challenges, Delta-neutral stablecoins, as an important direction of DeFi innovation, still hold immense potential. The key lies in finding a balance between profitability and safety. Successful projects need to possess several core elements: first, establishing transparent reserve proof and real-time monitoring mechanisms to allow users to verify the protocol's true status; second, implementing effective decentralized governance structures to avoid excessive concentration of key decisions in the hands of a few; third, building a multi-layered risk management system, including insurance funds, emergency pause mechanisms, and gradual risk exposure management. From a technical route perspective, the built-in derivatives market model has better decentralization characteristics and composability compared to the direct hedging model, but it needs to address liquidity guidance and user education issues.
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