The cryptocurrency market has recently endured significant turbulence, largely triggered by the de-pegging of synthetic stablecoins. These events, particularly involving Ethena’s USDe and Stream Finance’s xUSD, unveiled critical vulnerabilities within the DeFi ecosystem, leading to massive liquidations and a profound loss of investor confidence. The resulting cascade of failures has left a lasting impact, highlighting the inherent risks associated with certain algorithmic and synthetic financial instruments in crypto.
The USDe De-peg and Liquidation Cascade
On October 10, the market was shaken when Ethena’s synthetic dollar, USDe, briefly de-pegged on Binance, plummeting to $0.65. This sharp deviation from its intended 1:1 USD peg activated an "auto-deleveraging" (ADL) mechanism, akin to a forced margin call, across various platforms. As many futures traders used USDe as collateral, their positions were automatically liquidated, creating a rapid cascade that quickly spread. This event led to the wiping out of nearly $20 billion in positions and contributed to a significant downturn in the broader crypto market, with Bitcoin struggling to maintain key price levels in the aftermath. The difficulty for market makers to swiftly provide liquidity on Binance further exacerbated the crisis.
The xUSD Contagion and Eroding Trust
Just weeks later, on November 4, the DeFi space experienced another major contagion with the de-pegging of xUSD, a yield-bearing synthetic stablecoin from Stream Finance. Unlike the USDe event, the xUSD crisis was rooted in opaque strategies and the alleged loss of $93 million in user assets to an external fund. This lack of transparency triggered widespread panic, redemptions, and further de-pegging, ultimately wiping out an estimated $40 billion in DeFi liquidity. The xUSD team subsequently went quiet, leaving users with substantial losses and the stablecoin unable to regain its peg. These successive failures have instilled deep skepticism among investors, leading to a significant retreat from synthetic stablecoins, evidenced by USDe’s market cap halving since the October crash.
