The total value locked (TVL) in Ethena’s synthetic stablecoin, USDe, has experienced a significant contraction, falling by around 50 percent from US$14.8 billion in October to about US$7.6 billion in recent weeks. This sharp decline highlights the risks that come with yield-bearing stablecoins, especially in volatile market conditions. The scale of the drop shows how quickly capital can exit when incentives shift and leveraged users unwind their positions.
Yield compression drives liquidations
The main factor behind this decline appears to be a severe compression in annual percentage yields. Ethena’s offering, which previously reached double-digit figures during favourable periods, has reportedly fallen to around 5.1 percent. For many users, the appeal of USDe was tied directly to the income generated through staking. Once the yield dropped, the incentive structure changed quickly.
This matters because a large portion of USDe’s growth came from leveraged strategies built on borrowing. The reduced yield made the protocol less appealing to investors, especially when borrowing costs on established platforms offered little advantage. Borrowing on Aave, for example, was reported to cost around 5.4 percent, creating a situation where it became more economical to borrow elsewhere rather than rely on the USDe carry trade.
Investors who relied on looping strategies, using staked USDe (sUSDe) as collateral to borrow stablecoins like USDC, suddenly found that their positions were no longer profitable. As yields slipped, these trades became unsustainable. Positions were unwound, margin calls were triggered, and forced liquidations accelerated the TVL decline.
High transaction volume shows ongoing use
The situation underscores the importance of evaluating yield sustainability, protocol collateralization, and the risks created by market correlation and rapid liquidations. Although the decrease in TVL is substantial, some analysts suggest that the recalibration could lead to a healthier foundation if funding conditions stabilize or Ethena adjusts its mechanisms.
Despite the contraction in deposits, USDe transaction volumes reportedly exceeded US$50 billion last month. This indicates that the stablecoin continues to circulate widely even as leveraged capital leaves the system.
