The mechanism currently driving the surge in Ethena's USDe market value will also become the culprit of its eventual collapse.
Written by: Duo Nine⚡YCC
Translated by: Saoirse, Foresight News
Once short sellers return, Ethena and Fluid will severely impact the cryptocurrency market.
This is certain, and I will explain how it will happen in the following text.
The mechanism currently driving the surge in Ethena's USDe market value will also become the culprit of its eventual collapse.
Where have we seen this situation before?
At the time of writing, Ethena's USDe stablecoin market value is approaching $10 billion, becoming the third-largest stablecoin. This should not excite you, but rather make you cautious. Because this growth is largely not based on a solid foundation, but more like a castle in the air.
In short: Leverage cycles are breeding this bubble!
Formation of the Bubble
With just $100,000, you can build a position with a total value of $1.7 million through this operation. Moreover, on the Fluid protocol, you can complete this with a single click of the "leverage" button. They are inflating the total value locked (TVL) in this way.
(Note: The text refers to a nominal asset scale of $1.7 million, not the actual net funds. It is the sum of total supplied collateral in the table below. Essentially, it amplifies the scale of liabilities and collateral through leverage cycles, not truly "creating" $1.7 million in value.)
You take $100,000 and exchange it for USDe, then deposit it as collateral in Fluid's stablecoin pool (such as the USDT-USDC pool). Then, you borrow $90,000 in USDT and exchange it for $90,000 in USDe.
You deposit this $90,000 in USDe as collateral again, borrow $81,000 in USDT, and exchange it to USDe. Repeat this exchange and lending process 20 times. After 20 cycles, your remaining borrowing limit is $10,000. Congratulations, you have created "magical network currency".
Chart One
With protocols like Fluid, this operation has become extremely simple. Looking at Fluid's stablecoin pools, you'll find that almost all pools are nearly full.
For example, the USDe-USDT/USDC-USDT pool's lending ratio has reached 89.2%, with a maximum collateralization rate of 90%. Once it reaches 92%, liquidation will be triggered.
What happens if USDe depegs from USDT/USDC by 2%? The following text will explain in detail.
Why are people rushing to buy USDe?
Because it offers the highest yield!
Currently, the $1.7 million position built with $100,000 initial capital can generate $30,000 in annual revenue. After deducting borrowing costs (collateral annual yield 8% - debt annual yield 5%, see Chart One), the actual annual yield is still around 30%.
(Note: Annual yield = (Collateral yield - Borrowing cost) / Initial capital, calculated based on the total collateral and total borrowed amounts from 20 cycles in Chart One, approximately 31.717%.)
If the sUSDe basis trade yield further increases, the annual yield for the same principal could even reach 50% or 100%. Sounds wise, doesn't it?
But it's only wise if you "exit before the music stops". As history shows, there's no free lunch. Someone will always pay the price, and you must ensure you're not the one paying the bill.
Otherwise, your entire principal may evaporate overnight, especially when you reinvest your earnings into this cycle. At the time of writing, AAVE's $1.5 billion USDe supply on the Ethereum network has reached its limit, and people are pushing this leveraged operation to the extreme.
Before the bubble bursts, USDe's market value will continue to break records. When its daily growth reaches around $1 billion, make sure to exit completely. The top is near, and someone will always pay for this feast.
Ensure that person is not you!
The Inevitability of Collapse
It can be certain that a collapse will eventually occur. Why such a definitive statement?
Because the larger USDe's market value becomes, the greater the pressure of the bubble bursting when the "music stops".
Essentially, when short sellers return, the higher USDe's market value, the faster and larger its depeg will be. A mere 2% depeg is enough to trigger massive liquidations on Fluid, thereby exacerbating the crisis.
⚠️ USDe's depeg is the "safety valve" of this enormous bubble!
At that time, all users performing leverage cycle operations on Fluid and other protocols will face liquidation. Hundreds of millions of dollars in USDe will suddenly flood the open market for sale.
As the liquidation chain reaction starts, USDe could depeg by 5% or more. Countless people will be left with nothing, potentially triggering systemic risks and impacting the entire decentralized finance ecosystem. The situation could turn dire quickly.
Moreover, the trigger for the collapse could also be market demand exhaustion: When the USDe basis trade yield continues to decline (even turning negative), until the leverage cycle operation loses its profit margin, with borrowing costs exceeding yields, the crisis will erupt.
This will first lead to liquidation notices for leveraged users on Fluid. If it triggers a chain of liquidations, USDe's pegging mechanism will completely collapse. No one can predict the exact time, but at the current pace of development, this day will surely come.
Only users with no liquidation points or extremely low liquidation thresholds will survive. After leverage is completely cleared out, USDe might restore its peg.
The ideal scenario for mitigating the crisis is a slow and orderly deflation of the USDe bubble, but this is almost impossible in the current market environment. Especially for a bubble over $10 billion, market reversals are often extremely violent.
History Always Repeats
This is no exception. It's identical to every cycle I've experienced. Ethena, Fluid, and many protocols are actively creating conditions for this collapse.
No one is discussing this issue because it's not "sexy" enough.
Ethena is happy to see this, as USDe's market value surge means a surge in revenue; Fluid is also happy, as the total value locked skyrocketing brings revenue growth. But note: they are not the ones paying the bill, they are the restaurant owners.
This is the root of cyclical fluctuations in the cryptocurrency market!
Bear markets are cycles of leverage clearing, while bull markets are cycles of leverage breeding bubbles.
There's nothing new under the sun.
Personal Opinion
I have been participating in Ethena's yield farming since its early days, and their achievements so far are impressive. However, I currently do not hold any USDe and have no plans to do so in the future, as the risks are too high.
There are better protocols in the market that can provide comparable or higher annual yields with lower risk. For example, Resolv's USR/RLP or Hyperliquid's HLP vault. HLP does not support leverage cycle operations, which is precisely its advantage.
As for Fluid, they have indeed innovated: allowing users to obtain higher yields on stablecoins and simplifying leverage cycle operations to be accessible to everyone. Based on their growth scale, this model has undoubtedly been successful.
However, these two protocols and all projects built on Ethena or Fluid are jointly inflating a massive bubble. I issue this warning because such scenarios have been seen too many times.
I have no bias against these protocols; they are merely the biggest drivers of the current bubble, with followers increasingly growing in number.
Lastly, I want to say that Bitcoin is the final source of liquidity in the cryptocurrency market. This means that when a crisis erupts, Bitcoin will absorb the impact, and its price will be under pressure, providing a buffer for people in the bubble they have created. Also, please pay attention to Saylor and the dynamics of his MSTR bubble.
Each cycle has new players, but the plot has never changed.
