Third-Largest Stablecoin, Ethena, Briefly Loses USD Peg Amidst Crypto Weekend Crash, Market Cap Drops

Over the weekend, the third-largest stablecoin, USDe, briefly lost its 1:1 dollar peg as U.S. President Donald Trump’s announcement of a 100% additional tariff on China ignited a massive crypto market sell-off. Ethana’s yield-bearing stablecoin briefly dropped to $0.65 before regaining parity with the USD.

Ethena’s Algorithmic Stablecoin Shakes Under Pressure

Ethana’s yield-bearing stablecoin, USDe, which offers a 5.5% yield to holders, suffered a depegging over the weekend as the U.S. announced an additional 100% tariff on China. The announcement sparked a major sell-off, which caused the prices of Bitcoin, Ethereum, and Solana to crash by more than 10% within eight hours. 

As the panic spread across the crypto market, numerous altcoins crashed by as much as 50% or more in some cases. In 24 hours, the crypto market suffered liquidations of more than $20 billion, causing instability in the market. More than 1.6 million crypto traders got liquidated during this period, according to Coinglass data.

Under this market-wide pressure, Ethena’s algorithmic stablecoin USDe yielded, briefly losing its 1:1 USD pegging and dropping to around $0.65 on Binance before partially stabilizing.

Binance quickly responded to concerns about USDe and two other tokens that lost their pegs during the market crash. In a blog post, the exchange said that their team was conducting a thorough review of the impacted users, the details surrounding these liquidations, and the appropriate compensation measures for affected users.

USDe Re-Pegs, Ethena Responds

The depegging lasted less than four hours, with the synthetic dollar, USDe, returning to its 1:1 peg, which it still holds even at the time of this writing. In a media post, Ethena Labs, the project behind the USDe stablecoin, said that it remained over-collateralized, even through the widespread liquidations.

Ethena Labs explained that the USDe stablecoin briefly lost its peg due to the widespread market depegging. USDe is backed by a reserve of digital assets, including stablecoins like USDT and USDC. With many of these digital assets dropping sharply, the secondary price of USDe was briefly affected, even if it remained over-collateralized. 

The company also explained that the mint & redeem functionality remained operational throughout the depegging, and no downtime was experienced. However, due to liquidations, perpetual contracts have been and continue to trade at a discount to the spot price. 

Ethena Labs explained that last week’s events created additional unexpected uPNL within USDe, as Ethena was short on these contracts, which is currently being realized to the benefit of the protocol.

USDe Loses Market Cap After Depegging

Even though the depegging lasted for just hours, and Ethena Labs claims USDe remains overcollateralized, there have been concerns from investors. Like the TerraUSD collapse of 2022, stablecoin depegging events can shake the entire crypto market.

Because traders rely on stablecoins for liquidity, lending, and collateral, a loss of confidence can trigger liquidations, which will affect the crypto market volatility. Before the depegging, USDe had a market cap of over $14.8 billion. At the time of this writing, its market cap has dropped to $12.6 billion, as many investors and traders are redeeming their USDe.