Ethena USDe TVL Plummets 50% as Yield Compression Triggers Leveraged Unwind

Ethena's USDe, a crypto-native synthetic stablecoin, has witnessed a severe decline in its total value locked (TVL), falling from $14.8 billion in October to $7.6 billion, a drop of over 50%. This contraction occurred despite continued growth in onchain usage, with more than $50 billion in transaction volume recorded last month, indicating sustained utility for the token.

The TVL collapse is largely driven by yield compression, where the annual percentage yield (APY) offered by USDe has decreased to roughly 5.1%, down from double-digit rates earlier in the year. This decline stems from compressed perpetual funding rates amid weaker market conditions and reduced leverage demand. USDe maintains its peg by holding spot crypto collateral and taking offsetting short positions in perpetual futures markets to capture yield differentials.

Key to the downturn is the unwinding of leveraged looping strategies, particularly on DeFi lending platforms like Aave. These strategies involved repeatedly depositing staked USDe (sUSDe) as collateral, borrowing USDC at high loan-to-value ratios, and recycling funds to achieve effective leverage of 10x or more. However, as USDe's APY dropped below the 5.4% cost of borrowing USDC on Aave, these positions became unprofitable, triggering mass liquidations and accelerating capital outflows.

The event highlights the vulnerabilities of yield-bearing stablecoins in DeFi, where leverage mechanics can amplify both growth and contraction cycles, raising questions about sustainability in volatile markets.