Labeling Ethena USDe as a stablecoin poses a significant systemic threat to the broader cryptocurrency ecosystem, according to OKX founder Star Xu. Following a dramatic market event on October 10, which saw widespread liquidations and a cascade of losses, Xu has raised concerns about USDe’s classification and the lack of adequate risk controls surrounding it.
Xu, who is among the early investors in Ethena, emphasized that USDe should not be treated as a traditional stablecoin pegged 1:1 to the U.S. dollar. Instead, he argues, it functions more like a “tokenized hedge fund” — a financial instrument inherently exposed to volatility and market risks. The misconception that USDe maintains a fixed value can mislead traders and platforms, creating dangerously false assumptions of stability.
“USDe is not engineered to maintain a rigid peg to the dollar,” Xu stated. “If the market continues to treat it as a stable asset, without acknowledging its structural risks, we could be sleepwalking into another massive liquidity crisis.”
His warning comes on the heels of a flash crash that began with USDe losing its peg on Binance, plummeting by 35%. Though this price dislocation was primarily confined to the Binance exchange, the consequences were far-reaching. The sudden drop triggered automatic margin calls and liquidations across multiple platforms, wiping out approximately $19 billion in leveraged positions — the largest single-day liquidation event in crypto history, eclipsing even the FTX fallout and the COVID-19 crash.
Ethena founder Guy Young attempted to downplay the incident, describing it as an isolated liquidity issue rather than a fundamental flaw in USDe’s design. However, critics argue that even a localized de-peg can spread contagiously through the interconnected crypto ecosystem, especially when market makers are unable to step in due to restricted access or technical bottlenecks.
One stark example of the systemic vulnerability came when access to Binance became unstable during the crash. This effectively cut off liquidity providers — the “firefighters” of the market — from intervening to stabilize prices. Haseeb Qureshi, partner at venture capital firm Dragonfly, likened the situation to a fire breaking out while all roads for emergency response were blocked. Without market makers providing liquidity, the de-peg rapidly intensified into a full-blown market panic.
Decentralized derivatives platforms like Hyperliquid responded with aggressive auto-deleveraging mechanisms, forcibly closing user positions at unfavorable prices to protect the platform from insolvency. While effective in preserving protocol integrity, these measures inflicted steep losses on traders, especially those using coin-margined positions where USDe was used as collateral.
In the aftermath, Binance initiated over $280 million in compensation payouts to affected users, highlighting the severity of the incident. Meanwhile, Ethena’s governance token ENA showed signs of recovery, rebounding more than 10% in the days that followed. Still, broader market sentiment remained cautious, with traders and institutions reassessing their risk exposure.
The incident has reignited debate over the classification and risk management of algorithmic or synthetic stable assets. Unlike traditional fiat-backed stablecoins, USDe relies on a complex mechanism of hedging strategies and derivative exposure to maintain its target value. While innovative, this structure introduces layers of risk that are not immediately apparent to retail users.
Many experts are now calling for stricter regulatory guidelines and clearer disclosures around such assets. The lack of transparency and the marketing of USDe as a “stablecoin” could mislead users into underestimating potential volatility. Some industry observers argue that USDe should fall under a category akin to crypto hedge fund tokens, not stablecoins, and be subjected to corresponding compliance standards.
Additionally, the event serves as a wake-up call for centralized exchanges and DeFi platforms alike to implement more robust liquidity frameworks and circuit breakers. The absence of these tools allowed a localized price anomaly to metastasize into a massive liquidation spiral, affecting not just USDe holders but the entire market.
Looking forward, the crypto industry may need to reconsider how it defines and manages synthetic dollar assets. The assumption that all stablecoins behave alike has now proven dangerously flawed. Instead, a tiered classification system — distinguishing between fiat-backed, algorithmic, synthetic, and hybrid models — could help traders and developers better understand the unique risks of each type.
Moreover, platforms listing such assets must ensure that their risk engines, margin requirements, and collateral frameworks reflect the true nature of the tokens involved. The false sense of security around USDe’s dollar peg contributed directly to the scale of the losses. Transparent labeling, real-time risk analytics, and diversified collateral options could mitigate similar disasters in the future.
In sum, the October crash was more than just a technical hiccup — it was a systemic stress test that exposed deep flaws in how emerging crypto assets are structured, marketed, and traded. As the industry continues to innovate, it must also evolve its risk management standards to prevent another catastrophic chain reaction.