Yield Compression Triggers DeFi Deleveraging Crisis: USDe TVL Halves

The total value locked (TVL) in Ethena's USDe stablecoin protocol has plummeted by 50% to $7.6 billion, marking a dramatic decline from its October peak of $14.8 billion. The collapse, driven by a sharp compression in yields and the unwinding of leveraged positions, has raised concerns about the sustainability of yield-bearing stablecoins in decentralized finance (DeFi) markets according to recent analysis.

The crisis began as USDe's annual percentage yield (APY) dropped from double-digit levels to 5.1%, undercutting borrowing costs on platforms like Aave, which remain at approximately 5.4%. This created a negative carry scenario, incentivizing investors to liquidate leveraged positions that had relied on staked USDe (sUSDe) as collateral. The cascading effect of forced liquidations accelerated the TVL hemorrhage, as leveraged traders faced margin calls and sUSDe collateral values eroded according to market data.

The collapse highlights the fragility of DeFi's leverage-driven strategies. Many investors had employed looping tactics - repeatedly borrowing USDC against sUSDe to maintain leveraged exposure - as long as USDe's APY exceeded borrowing costs according to market reports. However, as yields declined, these positions became unprofitable, triggering a self-reinforcing cycle of redemptions and liquidations. The deleveraging has been exacerbated by broader challenges in DeFi, including the shuttering of yield-farming operations and regulatory scrutiny of synthetic stablecoin mechanics.

Despite the TVL drop, USDe's onchain usage remains robust, with over $50 billion in transaction volume last month. The stablecoin maintains its $1 peg by holding spot crypto collateral while offsetting short positions in perpetual futures markets according to market analysis. However, the protocol's reliance on volatile crypto assets and the recent drawdowns in Ethereum-based treasuries - such as Bitmine's $4.1 billion in unrealized ETH losses - have amplified risks.

Regulatory developments may further shape USDe's trajectory. Anchorage Digital, a federally chartered crypto bank, has launched a rewards program for USDe and USDtb holders under the GENIUS Act, which prohibits yield-bearing stablecoins. By offering rewards through a separate entity, Anchorage aims to comply with U.S. regulations while providing incentives for token holders. This approach could serve as a blueprint for stablecoin issuers navigating the evolving regulatory landscape.

The TVL crash underscores broader risks for stablecoin investors. As yields normalize, protocols must balance competitive returns with sustainable collateralization and liquidation mechanisms. For now, USDe's TVL remains at a fraction of its peak, with recovery dependent on yield stabilization, improved market conditions, or protocol upgrades.