Yield Compression Sparks DeFi Unwinding Crisis: USDe TVL Drops by 50%

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Yield Compression Sparks DeFi Unwinding Crisis: USDe TVL Drops by 50%

Bitget-RWA2025/11/26 00:42

By:Bitget-RWA

- Ethena's USDe TVL collapsed 50% to $7.6B as yields fell below borrowing costs, triggering leveraged position liquidations. - Negative carry scenarios and cascading redemptions exposed fragility of DeFi's leverage-driven strategies reliant on yield differentials. - Despite $50B monthly volume, risks persist from crypto collateral volatility and $4.1B ETH losses in Ethereum treasuries. - Anchorage Digital's GENIUS Act-compliant rewards program may shape regulatory navigation for yield-bearing stablecoins.

The total value locked (TVL) in Ethena's

USDe

stablecoin protocol has dropped by half to $7.6 billion,

representing a steep fall from its high in October

when it reached $14.8 billion. This sharp contraction, caused by a rapid decrease in yields and the unwinding of leveraged trades, has sparked debate about the long-term viability of yield-generating stablecoins within decentralized finance (DeFi)

as highlighted in recent research

The turmoil started when USDe’s annual percentage yield (APY) slid from double digits to 5.1%,

falling below borrowing rates on platforms such as Aave

, which are still around 5.4%. This led to a negative carry,

prompting investors to unwind leveraged trades

that used staked USDe (sUSDe) as collateral. The resulting wave of liquidations sped up the TVL decline, as traders using leverage faced margin calls and the value of sUSDe collateral dropped

based on market data

This downturn exposes the vulnerability of leverage-based strategies in DeFi. Many participants had used looping—repeatedly borrowing

USDC

against sUSDe to amplify their exposure—as long as USDe’s APY stayed above borrowing costs

according to market reports

. But as yields fell, these strategies became loss-making,

setting off a feedback loop of withdrawals and forced sales

. The deleveraging has been made worse by wider issues in DeFi, including the closure of yield-farming projects and

increased regulatory attention on synthetic stablecoins

Even with the TVL slump,

USDe continues to see strong onchain activity

, with transaction volumes exceeding $50 billion last month. The stablecoin keeps its $1 value by holding spot crypto as collateral and hedging with short positions in perpetual futures

as noted in market analysis

. However,

the protocol’s dependence on volatile crypto assets

and recent losses in Ethereum-based treasuries—such as Bitmine’s $4.1 billion in unrealized ETH declines—have heightened risk.

Regulatory shifts could further influence USDe’s future. Anchorage Digital, a federally regulated crypto bank, has introduced a rewards program for USDe and USDtb holders under the GENIUS Act, which bans yield-paying stablecoins. By distributing rewards through a separate entity, Anchorage seeks to remain compliant with U.S. law while still incentivizing token holders. This strategy may become a model for other stablecoin issuers adapting to changing regulations.

The TVL plunge highlights broader dangers for those investing in stablecoins. As yields return to normal,

protocols must find a balance between attractive returns

and maintaining sound collateral and liquidation systems. For now,

USDe’s TVL is only a fraction of its former high

, and any rebound will depend on yield stabilization, better market conditions, or protocol improvements.

Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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