USDe's TVL Halves Despite Robust Onchain Usage, Exposing DeFi's Yield Fragility

Yield compression has triggered a 50% decline in the total value locked (TVL) in Ethena's USDe stablecoin, despite a surge in onchain transaction volume, according to a recent analysis. The synthetic stablecoin, which derives yield from perpetual futures funding rates, now holds $7.6 billion in TVL, down from $14.8 billion in October 2025, as leveraged carry trades unwind amid tighter market conditions. This divergence between TVL and usage underscores the fragility of yield-bearing stablecoins in decentralized finance (DeFi), where capital flows are highly sensitive to shifts in risk appetite and liquidity dynamics.

USDe's mechanism relies on maintaining a 1:1 peg to the U.S. dollar by holding crypto collateral and shorting perpetual futures, capturing the funding rate spread as yield. While the stablecoin currently offers 5.1% APY-down from double-digit returns earlier in the year-its profitability has been eroded by compressed funding rates and reduced demand for leverage. The decline has accelerated as borrowers on platforms like Aave now pay 5.4% for USDC, exceeding USDe's APY and prompting the unwinding of carry trades that previously amplified TVL growth.

The collapse of leveraged looping strategies, which involved recursively depositing and borrowing to achieve 10x leverage, has exacerbated the outflows. These strategies, once a cornerstone of DeFi capital efficiency, became unprofitable as yields fell below borrowing costs. Additionally, the maturity of Ethena's November perpetual tokens (PTs) has released liquidity back into markets, further softening demand for stablecoin leverage.

Despite the TVL contraction, USDe's onchain utility remains robust, with over $50 billion in transaction volume recorded in the past month. This suggests the token retains functional demand even as speculative positioning recedes. However, the broader DeFi ecosystem faces structural challenges, as protocols struggle to sustain yield-generating models amid a risk-off environment. Some projects have already shuttered stablecoin farming programs, raising questions about the long-term viability of yield-bearing assets.

Chaos Labs, a risk steward for Aave V3, has recommended lowering stablecoin borrow rates to 5.5% from 6.0% to realign with market conditions and stabilize utilization rates. The adjustment aims to mitigate further TVL drawdowns by improving rate competitiveness and encouraging organic borrowing demand as liquidity from PT maturities re-enters the system.

The USDe saga highlights the dual-edged nature of DeFi innovation: mechanisms that supercharge growth during bull markets can accelerate contractions during downturns. As yield compression reshapes capital flows, stablecoin issuers and DeFi protocols must balance user incentives with systemic resilience to avoid cascading liquidity risks.