The Impact of Stablecoin De-pegging: USDe, xUSD, and the October Market Collapse

The recent de-pegging of synthetic stablecoins like USDe and xUSD has significantly impacted the cryptocurrency market. The events following the October crash highlight the vulnerabilities within the crypto sector and the consequent panic among investors.

Key Takeaways

Synthetic stablecoins, particularly USDe, have seen their market caps halved since the October crash.
The automatic liquidation feature, or ADL, contributed to a major liquidation cascade following the USDe de-peg on October 10.
On October 10, USDe briefly fell to $0.65, prompting forced liquidations on various platforms and resulting in nearly $20 billion in losses.
The de-pegging of xUSD on November 4 further destabilized the DeFi ecosystem, with over $40 billion in liquidity wiped out.
The market for synthetic stablecoins is on shaky ground, with significant investor losses and concerns about the transparency and reliability of these assets.

Stablecoin de-pegs: USDe, xUSD, and the aftermath of the October market crash

Synthetic Stablecoins De-pegging: The USDe and xUSD Situation

The cryptocurrency market is still healing from the fallout of the crash on October 10. This event was ignited by the sudden de-pegging of USDe, a synthetic dollar, on the Binance exchange. Fundstrat’s Chief Investment Officer, Tom Lee, referred to the automatic liquidation mechanism (known as ADL) as a “bug” that should have been rectified by sourcing price data from various platforms. He stated that this situation led to significant capital destruction and diminished market liquidity.

Understanding the Risks of USDe De-peg

For those who may not be aware, the ADL functions similarly to a margin call, closing positions when market prices fall below collateral thresholds. The de-pegging of USDe resulted in urgent liquidations on Binance, shocking the market across other platforms. On October 10, USDe, which is designed to maintain a 1:1 ratio with the U.S. dollar, plummeted to around $0.65, nearly a 40% drop. Many futures traders utilizing USDe as collateral experienced forced position liquidations.

Stablecoins Source: USDe on Binance vs Kraken during the October crash

It took considerable time for market makers to access Binance and infuse the critical liquidity needed to stabilize the market. This delay amplified the already existing turmoil. Other exchanges, such as Hyperliquid, activated their ADL mechanisms to maintain solvency, exacerbating the cascading effect. Nearly $20 billion worth of positions were liquidated, resulting in trader despair and even reported incidents of suicide. The repercussions of this crash have left the crypto landscape forever altered, with Bitcoin unable to maintain levels above $90k in the following weeks.

The DeFi Contagion

On November 4, another traumatic event struck the DeFi sector as xUSD, an interest-bearing synthetic stablecoin from Stream Finance, faced its own de-pegging incident. Unlike traditional stablecoins, xUSD accepts deposits from users and invests them in yield-generating strategies. However, the strategies backing xUSD lacked transparency and verifiability, leading to catastrophic results.

Stablecoin Source: Coingecko

In total, over $93 million in user assets were lost due to an external fund issue, igniting panic, further de-pegging, and asset redemptions. In just a few days, around $40 billion in DeFi liquidity disappeared. Since then, xUSD has failed to regain its 1:1 peg, resulting in a lack of communication from the development team and significant losses for users. As a result, investors are now wary of investing in synthetic stablecoins, leading to a dramatic decrease in USDe’s market cap since October 10.

Stablecoin Source: Coingecko