# Ethena Under Pressure: The Great Stress Test 

*The result: a remarkable display of technical resilience, yet also a stark reminder of the structural risks embedded in the most sophisticated layers of decentralized finance.*

By [Jesus Crypto Plaza 🌳](https://paragraph.com/@cryptoplaza) · 2025-10-12

defi, derivatives, perpetuals, ethena

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Over the past few days, DeFi has faced one of the most intense volatility events since the collapse of Terra.  
Amid this chaos, **Ethena (USDe)** —a synthetic stablecoin backed by derivatives positions— underwent the most significant **stress test** in its history.

The result: a remarkable display of technical resilience, yet also a stark reminder of the **structural risks** embedded in the most sophisticated layers of decentralized finance.

Today, USDe stands as the **third most important stablecoin** in the market, behind USDT and USDC, with expanding integrations across both DeFi and CeFi.  
Its scale and reach now make Ethena one of the **most critical systemic risks** within the entire ecosystem.

* * *

⚙ **1\. The Ethena Model: Yield in Exchange for Structural Risk**
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Ethena’s core value proposition lies in offering a **higher yield** than traditional stablecoins —a return derived from **funding rates in perpetual derivatives markets**.

The protocol maintains **delta-neutral positions**: long on spot assets like BTC or ETH, and short through perpetual futures. This setup captures the positive funding rate differential as yield.

However, this mechanism introduces a key fragility:  
when **funding rates turn negative**, returns evaporate, and the protocol must absorb the loss. Since Ethena offers users a **fixed yield**, these fluctuations can compress margins and introduce short-term solvency risk.

In practice, funding rate dislocations rarely persist —arbitrage and market liquidity usually restore balance. However, during this recent event, those few hours of negative rates were enough to push the system into its most extreme operational conditions to date. **The protocol includes mechanisms to unwind or rebalance its derivative positions and reinvest collateral into alternative strategies, allowing it to adapt to shifting market conditions and mitigate prolonged funding stress**

* * *

🌊 **2\. The Event: Market Meltdown, Liquidations, and Price Dislocations**
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The market-wide liquidation wave that hit on Friday was brutal:  
over **1.6 million traders were liquidated**, and **$20 billion in open interest** vanished within hours.

In that context, USDe briefly **depegged to $0.66 on Binance**, while on-chain liquidity pools such as Curve, Uniswap, and Fluid showed far smaller deviations —around 30 bps, similar to USDC/USDT spreads during high volatility.

During the peak of stress:

*   Ethena’s **mint and redeem functions remained fully operational**, processing over **$2 billion in redemptions within 24 hours**.
    
*   **No downtime** occurred across the system.
    
*   Collateral oracles and proof-of-reserve feeds from **Chaos Labs** and **Chainlink** continued to function as expected.
    

This performance underscores Ethena’s **operational robustness**: as long as redemption liquidity exists, the peg can be restored by arbitrage even under extreme market pressure.

[![User Avatar](https://storage.googleapis.com/papyrus_images/4eb8295cf6ab271aacb4ec9662bed1332da6636a3903a5c4c6a17de9dc0228c6.jpg)](https://twitter.com/gdog97_)

[G | Ethena](https://twitter.com/gdog97_)

[@gdog97\_](https://twitter.com/gdog97_)

[![Twitter Logo](https://paragraph.com/editor/twitter/logo.png)](https://twitter.com/gdog97_/status/1977302774636540403)

While we share these suggestions privately with any partner we work with across both DeFi and CeFi, want to surface this publicly so there is zero doubt going forward on what we view as appropriate oracle design and risk management for USDe:

![](https://storage.googleapis.com/papyrus_images/25dcea16ddd618a713bc4c47303c1d43413a6e23177b679bca3db874170f1719.jpg)

 [![Like Icon](https://paragraph.com/editor/twitter/heart.png) 298](https://twitter.com/gdog97_/status/1977302774636540403)[

11:18 • 12 oct 2025

](https://twitter.com/gdog97_/status/1977302774636540403)

* * *

🧩 **3\. Risks Exposed: Dependencies and Design Boundaries**
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Still, the event revealed several **structural vulnerabilities** that cannot be ignored:

### 1\. **Dependence on Centralized Exchanges**

Ethena executes part of its hedging through **Binance**, which temporarily halted operations during the crisis.  
While Binance later announced compensation for affected users, the incident exposed **counterparty and operational risk** that the protocol cannot fully control.

### 2\. **Execution Risk in Extreme Conditions**

If negative funding persists, Ethena might need to unwind hedges quickly. In such conditions, **liquidity slippage and execution losses** can compound rapidly, eroding capital buffers.

### 3\. **Oracle and Collateral Valuation Risk**

As [@gdog97\_](https://x.com/gdog97_) noted, hardcoding USDe = USDT makes sense for temporary dislocations, but not for **permanent collateral impairment**.  
The proposed solution is dynamic oracle behavior tied to **on-demand Proof of Reserves (PoR)**, allowing trusted entities like Chainlink or Chaos Labs to verify whether a deviation is transient or structural in real time.

* * *

🔍 **4\. The Response: Transparency as a Survival Mechanism**
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In response to the market turmoil, Ethena Labs published an **extraordinary Proof of Reserves update**, outside of its usual weekly schedule:

> “USDe Proof of Reserves are typically provided on a weekly basis by third-party attestors including Chaos Labs, Chainlink, Llama Risk, and Harris & Trotter.  
> Following recent market events, each confirmed that USDe remains overcollateralized by approximately ~$66M. Maximum transparency.”

This statement helped restore market confidence and set an important precedent for **proactive disclosure and accountability** in DeFi —a stark contrast to the opacity that characterized the collapses of 2022.

[![User Avatar](https://storage.googleapis.com/papyrus_images/02749ad4f6441f7bde3b8df8cb7158eb9e5586fe5834bd839cfa3d20b183822e.jpg)](https://twitter.com/ethena_labs)

[Ethena Labs](https://twitter.com/ethena_labs)

[@ethena\_labs](https://twitter.com/ethena_labs)

[![Twitter Logo](https://paragraph.com/editor/twitter/logo.png)](https://twitter.com/ethena_labs/status/1976988523598385528)

USDe Proof of Reserves are typically provided on a weekly basis by 3rd party independent attestors including leading firms such as Chaos Labs, Chainlink, Llama Risk and Harris & Trotter.  
  
On request from the community, we have provided a Proof of Reserves outside of the regular

![](https://storage.googleapis.com/papyrus_images/d6c905ac705e94481607d5422035fe8e3a6b6b04c3ca4e5051a3440de0ab05c6.jpg)

 [![Like Icon](https://paragraph.com/editor/twitter/heart.png) 1,331](https://twitter.com/ethena_labs/status/1976988523598385528)[

14:29 • 11 oct 2025

](https://twitter.com/ethena_labs/status/1976988523598385528)

* * *

🧠 **5\. Lessons Learned: Resilience Proven, Not Guaranteed**
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The recent episode was one of the **three or four most extreme events in crypto history**, both in terms of volatility and systemic stress.  
Ethena not only survived —it did so while honoring all redemptions and maintaining liquidity under pressure.

But this should not be mistaken for invulnerability.  
Ethena’s design remains highly **sensitive to derivative market conditions**, funding dynamics, and exchange uptime.  
Its resilience has been proven in practice, but its **stability still depends on the integrity of external systems** it cannot fully control.

* * *

🧭 **6\. Conclusion: The Price of Efficiency**
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Everything suggests that **Ethena has successfully passed its first major stress test**, showing a level of resilience and responsiveness rarely seen in a protocol so closely tied to derivative markets.  
Its yield model, operational robustness, and proactive transparency have demonstrated a level of maturity that sets a new standard within decentralized finance.

However, the real confirmation will come in the **weeks ahead**.  
While the recent **independent audit of Ethena’s reserves** provides strong reassurance about the health of its balance sheet, continuous monitoring will be essential to verify that the system remains stable as market conditions evolve.

This episode is both a validation and a reminder:  
**innovation always carries cost**, and for algorithmic or synthetic stablecoins, the ultimate challenge is not merely to maintain a peg —  
but to **sustain trust through volatility** and prove that stability is not only architectural, but enduring.

Another key challenge will be to see whether this massive deleveraging —which led to the redemption of around $2 billion worth of stablecoins— ushers in a period of lower funding rates. Such a shift could reduce the stablecoin’s yield appeal and potentially limit its growth in the coming months.

**The real lesson is that innovation in DeFi rarely fails for lack of sophistication —it fails because efficiency itself pushes the boundaries of risk.**  
Ethena’s model embodies this paradox: the more optimized and capital-efficient a system becomes, the narrower its margin for error.  
True resilience in decentralized finance will come not only from designing smarter architectures, but from learning how to absorb volatility without breaking the trust that sustains them.

* * *

### 🪙 **Postscript**

Binance has announced case-by-case compensation for users affected by Friday’s volatility in markets for **USDe**, **BNSOL**, and **WBETH** —acknowledging degraded performance during peak liquidations.  
Such responses are positive signs of accountability but also underscore how **fragile the execution layer** of global crypto markets remains, even for the largest actors. [https://www.theblock.co/post/374278/binance-to-compensate-some-users-after-several-markets-depeg-there-are-no-excuses](https://www.theblock.co/post/374278/binance-to-compensate-some-users-after-several-markets-depeg-there-are-no-excuses)

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*Originally published on [Jesus Crypto Plaza 🌳](https://paragraph.com/@cryptoplaza/ethena-under-pressure-the-great-stress-test-that-redefined-systemic-risk-in-defi)*
