Review of the USDe Decoupling Incident and Legal Risks of Stablecoins

1. Crypto World Earthquake and USDe Decoupling

On October 11, 2025, the cryptocurrency market experienced severe turbulence again, with reports indicating a significant evaporation of the entire crypto market value, particularly affecting altcoins. In this crash, the world's third-largest stablecoin USDe (the "yield-bearing stablecoin" issued by Ethena Labs) severely depegged, with its price dropping to about 0.65 USD, losing its pegging function as a stablecoin in a short period.

2. Risk Identification from a Legal and Regulatory Perspective

1 Classification and Attributes of Stablecoins

The original intention of stablecoin design is to maintain a stable peg to a certain fiat currency, essentially being a token anchored to the value of the USD or other assets, but different design paths lead to entirely different legal attributes.

(1) Fiat-backed (e.g., USDT, USDC): Trusted centralized versions

This type of stablecoin is issued by institutions, with reserve assets including cash, short-term government bonds, etc. From a legal perspective, it is closer to electronic money or payment tools, with relatively clear regulation. Its risks mainly lie in custody and transparency, such as whether the reserves truly exist and whether they can be redeemed instantly.

(2) Crypto-collateralized (e.g., DAI): A self-consistent model of on-chain credit.

Users use ETH and other crypto assets as collateral to generate DAI after over-collateralization. Legally, it is closer to "digital goods" or "protocol-generated credit." The risks lie in liquidation and liquidity: when prices plummet, it becomes difficult to quickly liquidate the collateral assets.

(3) Derivatives and algorithmic types (such as USDe, UST): The stable illusion of financial engineering

The special feature of USDe lies in its reliance not on fiat currency reserves, but on a derivatives hedging mechanism to maintain a USD-equivalent position: using ETH or stETH as collateral; opening short perpetual contracts on exchanges to hedge against price fluctuations, and re-staking the collateral assets to earn yields, offsetting funding rates. This means that the stability of USDe actually depends on the liquidity and hedging costs of the derivatives market, rather than traditional USD reserves.

2. The stability mechanism of USDe and USDT

On October 11th, during the sharp decline, the price of USDT remained around 1 USD, while the price of USDe once plummeted from 1 USD to about 0.65 USD, almost replaying the "de-dollarization" collapse of Terra/UST in 2022. This is because, in most exchanges and market environments, USDT, USDC, and others have strong support during extreme collapses due to their scale, liquidity, and market trust. In contrast, the mechanism of USDe is more complex and relies more on market hedging structures, making it a high-risk target during sharp declines.

The stability mechanism comparison between USDe and USDT is as follows:

The structural high risk of USDe determines that it is more likely to encounter problems in extreme market conditions. In the USDT model, users deposit USD with Tether, which holds real fiat reserves (cash/government bonds), allowing users to redeem 1:1, maintaining stability. In the USDe model, users deposit crypto assets (such as ETH) into the Ethena contract, and the system hedges volatility by establishing short positions, generating a "synthetic dollar exposure," and ultimately issuing USDe tokens. In short, USDT has physical reserves, and its stability comes from "the money in the dollar account"; whereas USDe relies on market hedging and derivative contracts, with its stability stemming from "the mathematical balance of the hedged positions." Therefore, when the market experiences extreme fluctuations, the mathematical model may temporarily fail, while the bank account will not.

3. The Decoupling Chain of USDe

The recent decoupling of USDe is the result of multiple factors working together, and the chain reaction it triggered has also impacted the entire market. The transmission path of the USDe decoupling event is as follows:

The key mechanisms leading to this incident mainly consist of two aspects:

One is the "Delta Neutral Hedging" strategy of USDe - unlike stablecoins such as USDT and USDC that rely on fiat currency reserves, USDe is a "synthetic dollar" that maintains stability through the "Delta Neutral Hedging" strategy (i.e., constructing a spot long + futures short investment portfolio to make its overall net Delta value equal to or close to zero): going long on the spot side (holding spot assets like ETH) and going short on the derivatives side (simultaneously shorting equivalent ETH perpetual contracts at derivatives exchanges). The core revenue of this strategy comes from the funding rates in the perpetual contract market. Typically, in a bull market, the funding rate is positive, meaning long traders need to pay fees to short traders. Since Ethena holds a massive short position, it can continuously earn this funding rate income from the market and distribute it as profits to USDe holders. However, when the market enters a bear market or extreme crash, risks such as funding rate risk (the funding rate of perpetual contracts turns negative, eroding the protocol's reserve fund, transforming the strategy from a money-making machine into a money-burning machine), counterparty risk, collateral liquidation risk, and bank run risk can all trigger huge crises or even negative feedback loops. This was precisely the situation USDe encountered during the market crash on October 11, 2024: deep negative funding rates hit the most vulnerable "Achilles' heel" of this strategy.

Secondly, the boost from high-leverage "circular loans"—before the incident occurred, a model of obtaining high returns through circular loans was prevalent. Investors leveraged their principal and returns by repeatedly mortgaging, borrowing, and then depositing into USDe, with annualized returns even reaching as high as 50%.

Example:

Initial capital: 10,000 USDC

Lending Protocol: Aave

Number of cycles: 3 times

Collateral Ratio: 75% (You can borrow $75 worth of assets with $100 of collateral)

Through the cycle shown in the above diagram, the user ultimately established a risk position of USDe/sUSDe worth tens of thousands of dollars with a principal of $10,000. The true yield of the entire system is calculated based on the magnified total assets, resulting in an astonishing surface APY (Annual Percentage Yield). This cycle lending model attracted a large influx of funds, but it also made the entire system built on extremely high leverage, becoming exceptionally fragile.

The decoupling of USDe has not only triggered market panic but also raised a fundamental question once again: when the core of a "stablecoin" is constituted by a complex combination of algorithms and derivatives, who is actually responsible for the so-called "stability"? It can be said that this storm is not only a stress test of financial engineering but also a reality check on the legal boundaries of stablecoins.

3. The Trust Anchor of Stablecoins: Returning from Algorithms to Law

In the DeFi world, when the market is booming, everything can operate under the narrative of "decentralization"; however, when external shocks are strong enough, the "trust" in algorithms can collapse. This crisis has fully exposed the gray areas and potential risks in the DeFi sector under the current legal framework. The recent decoupling incident of USDe has made the market reawaken to the fact that the "stability" of stablecoins is not only a technical or market issue but also a proposition of law and trust. In this liquidity crisis triggered by the imbalance of derivative funding rates, the algorithms and models of USDe operated according to established logic, yet still could not avoid price deviation. This indicates that the certainty of technology cannot replace the certainty of law. Stability mechanisms must be built on a foundation that is legally verifiable and accountable.

1 The Boundaries of Algorithmic Trust and the Return of Legal Trust

The "re-staking + hedging" model represented by USDe attempts to achieve dollar-equivalent "synthetic stability" through financial engineering. This model, which is based on algorithmic logic for trust, essentially relies on a series of market assumptions: sufficient liquidity, effective derivatives hedging, and returns covering costs. However, these conditions are often difficult to meet in extreme market conditions. Therefore, the trust constructed by the algorithm is "conditional trust" rather than "institutional trust."

In contrast to USDe, there are centralized stablecoins like USDT and USDC that are based on "fiat reserve + compliant custody" as their core. Their "trust anchor" is established on legal responsibilities and audit systems, such as:

• Clear legal entities: Issued by regulated companies (such as Tether, Circle), responsible for redemption obligations.
• Fiat currency or government bond reserves: Reserve assets can be audited and traced.
• Operate within a regulatory framework: Comply with FinCEN (Financial Crimes Enforcement Network), NYDFS (New York State Department of Financial Services), EU MiCA and other payment and electronic money regulatory rules.

Therefore, even with significant market fluctuations, the prices of USDT and USDC remain around 1 USD. This stability is not the result of algorithms, but rather the outcome of legal constraints and a transparent system.

2 Building Trust Anchors

The de-pegging proof of USDe, even if the algorithm is highly complex, may still fail in extreme situations; the true stability of stablecoins must come from the combination of "legal trust + technological transparency." This means:

(1) Algorithm design must have legal boundaries, such as the stabilization mechanism should clarify the responsible party, redemption rights, and risk disclosure obligations; hedging or re-staking models should publicly disclose strategy logic and sources of funds; investors should be clearly aware of the types of risks they are participating in (whether they constitute derivatives, investment contracts, etc.).

(2) The regulatory framework needs to adapt to technological innovation, implementing a three-tier review of algorithmic stablecoins with "disclosure - monitoring - reserve verification," while incorporating the transparency of smart contracts into regulatory technical standards.

(3) Stablecoins should establish a "trust hierarchy system," where the foundation is based on fiat currency reserves and compliance audits, while the upper layer enhances operational efficiency through on-chain algorithms and automated hedging, creating a structural balance of "institutional stability + algorithmic flexibility."

Currently, the global regulatory trend has gradually pushed the trust structure of stablecoins from "algorithmic single-layer" to "legal-algorithmic dual-layer":

Under this structure, algorithms no longer replace laws but become execution tools within the legal framework. This is also the core direction proposed by the U.S. "Clarity for Payment Stablecoins Act" and the "GENIUS Act" — requiring stablecoins to be issued by "regulated entities or qualified custodians," with reserves limited to highly liquid assets (such as government bonds, cash, repurchase agreements), and prohibiting purely algorithmic stablecoins from being sold to U.S. citizens without registration. Meanwhile, according to the EU's "MiCA Act," any asset-backed tokens (including stablecoins) publicly issued to EU residents or listed on EU trading platforms must be issued by entities established and authorized in the EU, while also disclosing reserve asset structure, custody and audit information in the white paper, and developing redemption and orderly liquidation plans. It is evident that the common goal of these laws is to bring the risks of algorithmic stablecoins back into the "trust radius" of financial regulation.

3 The True Meaning of Stability

The decoupling of USDe is not a coincidence, but an inevitable outbreak of an "algorithmic trust crisis." Code can define rules, but it cannot define responsibility. The ultimate value of stablecoins lies not in the intricacies of algorithms, but in the sustainability of trust. The future of stablecoins is destined to be a community of law and algorithms—technology provides execution capabilities, while law provides the boundaries of trust; algorithms maintain balance, and law ensures stability. Only when law and code are interwoven can stablecoins truly achieve the word "stability."