USDe once ranked as the third largest stablecoin thanks to the delta neutral hedging mechanism, but its scale shrunk after the crash on October 11, 2025.

Written by: Conflux

Stablecoins are not a field where everyone has a chance. Statistics from ARK Invest analyst Lorenzo Valente show that the number of stablecoins with a market capitalization exceeding 1 billion USD increased from single digits to 12 over four years; for those over 10 billion USD, in the peak of 2022 there were 4, but now only Tether and Circle remain. As the threshold rises, the number of players decreases sharply; this is a typical characteristic of network effect assets: whether exchanges, payment networks, and DeFi protocols are willing to connect depends on whether the scale is already large enough.

This series aims to track: who is maintaining the thresholds they have already occupied, who is trying to break the rules to climb higher, and which direction regulation and capital are pushing this competition.

On October 11, 2025, one of the largest liquidation events in the history of the crypto market occurred. During this market storm known as the "1011 crash," CoinGlass reported that the total liquidation amount exceeded 19 billion USD, setting a historical record at that time. The price of USDe on Binance once dropped to 0.65 USD.

This global third largest stablecoin at the time was initially supported at 1 USD by hedging trades rather than cash reserves. A year later, its circulating size shrank from about 14.7 billion USD to less than 5 billion USD, dropping to fifth place; the things supporting it have also changed.

Initial Design

USDe was issued by Ethena Labs, the developer of the synthetic dollar protocol, launched in February 2024, with founder and CEO Guy Young. Early investors include crypto venture firm Dragonfly, Binance's investment arm Binance Labs, cryptocurrency exchange Bybit, and OKX's investment arm OKX Ventures.

Its initial design did not rely on cash and U.S. Treasury bonds to directly support 1 USD, nor was it an over-collateralized vault like the DAI and USDS under Sky (formerly MakerDAO), but rather a "delta neutral" hedging mechanism: Ethena constructed a spot position using ETH and other crypto assets along with related staking assets while establishing corresponding short positions on exchanges, attempting to hedge against price fluctuations of the underlying assets.

This type of "spot plus short" arbitrage has been done by hedge funds and market makers for many years, with Ethena turning it into a token that can circulate on-chain. Revenues mainly come from two parts: the native yield from staking assets and the funding fee income from short positions, both of which constitute the source of returns for users holding the staked version sUSDe.

"No cash" describes USDe's initial design, not its later complete reserve structure. Ethena's governance report in August 2025 revealed that about 54% of USDe's collateral was stablecoin-backed assets, while about 46% was related to delta neutral strategy positions.

How It Rose to Third

From 2024 to 2025, the overall crypto market strengthened, with perpetual contract funding rates remaining positive during many periods, allowing short sellers to earn funding fee income, thus boosting USDe's yields.

The leverage cycle in DeFi further increased its scale. The industry referred to the strategy around Ethena assets built on Aave and Pendle as "Aavethena": users deposited related assets as collateral on Aave, borrowed funds and then continued to allocate them to USDe-related assets; some even combined yield strategies and borrowing leverage through Pendle's principal and yield tokens.

According to industry research firm Stablecoin Insider, from May to August 2025, the total locked value of the Pendle protocol rose from about 3 billion USD to 10 billion USD. By September, USDe and its derivatives accounted for about 75% of the total locked value of Pendle.

Before the "1011 crash," USDe had a circulating size of about 14.7 billion USD, accounting for about 5% of the entire stablecoin market, second only to USDT and USDC.

On that Day at 0.65 USD

The impact of this liquidation quickly spread to the entire crypto market. Research firm 10x Research estimated that, in the weeks following the crash on October 10, 2025, the total market capitalization of cryptocurrencies decreased by about 1.3 trillion USD. This extreme market situation also brought USDe into the spotlight.

The price of USDe on Binance dropped to 0.65 USD, while on Bybit it hit a low of about 0.92 USD, whereas the on-chain pool prices on major trading platforms generally maintained around 0.99 USD.

According to a recap from the Ethena governance forum, Binance's internal oracle at the time used its order book prices alone as the pricing basis for USDe, amplifying the price deviation during extreme market conditions. Meanwhile, some trading firms faced difficulties in deposit and withdrawal, further restricting cross-platform arbitrage.

From October 10 to 11, about 1.9 billion USD of USDe redemptions were processed. Analysts from crypto media Blockworks remarked that this large redeeming was handled quickly, showing strong resilience in the mechanism.

However, this only indicates that during that event, the redemption channels and reserve system withstood the pressure. Whether users could redeem through the protocol, whether they could sell at a price close to 1 USD on exchanges, whether the value of reserve assets was sufficient to cover liabilities, and whether the reserve assets could be liquidated timely during concentrated redemptions are four different matters.

Redemptions Continued, Confidence Diminished

The continuation of redemptions does not mean that confidence has not been damaged.

On October 9, 2025, the circulating volume of USDe was about 14.7 billion USD, falling to about 9.2 billion USD by the end of the month; by the end of December, there was a cumulative net outflow of about 8.3 billion USD, reducing the circulating scale to about 6.3 billion USD. The governance token ENA dropped about 62% during the same period, falling below 0.2 USD.

The reasons for the outflow of funds were not only panic. After the liquidation, perpetual contract funding rates fell sharply, and short players could no longer consistently earn funding fee income; leveraged positions in protocols like Aave were liquidated, making redeeming USDe one of the ways for some users to unwind related positions.

During the same period, profit-generating stablecoin products like sUSDS under Sky and syrupUSDC from institutional lending platform Maple Finance attracted inflows instead.

Only 1% of Hedge Positions Left

In 2026, Ethena gradually adjusted the reserve composition of USDe. According to Ethena's governance report, the proportion of crypto asset basis trading positions in reserves dropped from 11.4% at the end of March 2026 to about 1% by the end of June. The basis trading metrics here are not entirely comparable to the related positions of perpetual contracts reported in August 2025.

By the end of April 2026, approximately 57.2% of reserves were liquid stablecoins, 29.3% were DeFi lending positions, and institutional lending accounted for about 0.3%; by the end of June, the share of institutional lending rose to about 6.9%, and tokenized collateral loan certificates (CLO) and other assets appeared in reserves.

Ethena also proposed four decentralized directions: extending tokenized assets beyond short-term U.S. Treasury bonds, expanding the delta neutral framework to stocks and commodities perpetual contracts, developing institutional lending, and exploring a prime brokerage-style lending approach oriented towards trading firms.

Institutional lending is one important new path. Ethena began allocating some stablecoins in reserves to institutional credit, participating in over-collateralized loans through partner institutions. Relevant arrangements involve different functions like loan origination, collateral management, and third-party custodianship, with specific risks dependent on the loan structure and responsibilities undertaken by all parties.

Anchorage Digital Bank also serves as the U.S. issuer for Ethena's institutional stablecoin USDtb. On August 19, 2026, institutional broker FalconX announced a partnership with Ethena to provide about 1 billion USD in secured financing arrangements through a bankruptcy-remote special purpose vehicle, with the funds allocated for over-collateralized institutional lending.

As the proportion of basis trading positions declines, the risk focus of USDe is shifting from funding rates and counterparty risk to broader asset allocation risks, including risks from DeFi protocols, the creditworthiness of institutional borrowers, and the liquidity of loan collateral during extreme market situations.

The proportion of sUSDe in USDe's circulating volume is also decreasing. Ethena's governance report in September 2025 indicated that the scale of sUSDe was about 6.15 billion USD while the total supply of USDe was about 14.5 billion USD, accounting for about 43%; according to industry analysis compiled from DefiLlama data, this ratio was about 27% in August 2026.

Money Changed Hands

In 2026, the scale of USDe did not return to pre-liquidation levels. Mid-March was about 5.92 billion USD; as of August 22, according to DefiLlama data, the circulating size was about 4.1 billion USD, ranking fifth among stablecoins, accounting for about 1.33% of the entire market. At its peak, it was the third largest stablecoin, accounting for about 5%; on September 19, market tracking websites indicated its scale had rebounded to about 4.8 billion USD.

Returns are no longer at the previous levels. According to DefiLlama data, USDe's annualized yield exceeded 50% in early March 2024 but was about 4.3% by late December 2025. Both figures are annualized data for specific points in time and do not represent the actual earnings for the corresponding months.

Funding sources are also changing. One of the main driving forces behind USDe's scale growth in the past was the circular leverage strategies built around it on Aave and Pendle; now, Ethena is expanding into channels like institutional investment management and payments.

USDe has connected with BlackRock's Aladdin investment management platform and has been included in the collateral system for cryptocurrency asset yield products offered by U.S. retail broker Robinhood. These involve platform integration and product integration, not direct holdings or endorsements of USDe by BlackRock.

In September, Ethena began expanding into payment scenarios. On September 1, Ethena launched a self-custodial financial application called Ethena Pay, operating on Avalanche, which is still in testing. The product supports USD balance yields and cash-back incentives for card spending, with balance yields up to 6%, but including adjustable promotional rewards, not guaranteed interest; regular cash-back for spending is up to 5%, paid in AVAX.

On September 11, USDe and sUSDe were launched on the Tron network, further expanding the multi-chain coverage of Ethena's products.

The major liquidation that occurred a year ago tested USDe's hedging mechanism. The redemption channels withstood the pressure, but funds have continued to flow out in the following months.

A year later, Ethena has reduced basis trading positions to a small part of reserves, allocating more funds to stablecoins, DeFi lending, institutional loans, and tokenized credit assets. The benefit is reduced reliance on perpetual contract funding rates, while the cost is the risk shifting from trading markets to borrowers' creditworthiness, loan collateral, and the liquidity of credit assets.

The next time there is a wave of redemptions at the level of 1.9 billion USD, can loans arranged through institutions like Anchorage and Maple be converted back to cash as quickly as closing out a short position?