Author：Kung Fu tea bug

Ethena's USDe, the crypto-native synthetic stablecoin that generates yield through perpetual funding rates, has recently seen its total value locked decline from $14.8 billion in October to $7.6 billion, a drawdown of over 50% despite continued growth in actual usage. The decline highlights the complexities of yield-bearing stablecoins in DeFi, where leverage mechanics can amplify both growth and contraction cycles.

USDe maintains its peg by holding spot crypto collateral while taking offsetting short positions in perpetual futures markets, capturing the funding rate differential as yield for holders. The stablecoin currently offers roughly 5.1% APY, down from double-digit yields earlier in the year as perpetual funding rates compressed amid weaker market conditions and reduced demand for leverage.

Despite the TVL decline, USDe usage has trended upward with more than $50 billion in onchain transaction volume last month, suggesting the token retains utility even as speculative positioning unwinds.

The sharp TVL contraction appears largely driven by the unwinding of leveraged looping strategies that proliferated across DeFi protocols, particularly on lending markets like Aave. These carry-trade strategies involved repeatedly depositing staked USDe (sUSDe) as collateral, borrowing USDC at high loan-to-value ratios, swapping back to sUSDe, and repeating the process to achieve effective leverage of 10x or more. As long as USDe's APY exceeded USDC borrowing costs, the trade remained profitable; however, declining yields have now dropped below the 5.4% cost of borrowing USDC on AAVE, leading some to unwind their carry trades.

USDe's deleveraging has been exacerbated by challenges facing some DeFi protocols regarding the sustainability of their stablecoin yield-farming setups, with some shuttering these operations or facing questions about their underlying mechanics. This dynamic illustrates the vulnerability of yield-bearing stablecoins to rapid capital flight when leveraged positions unwind, as the same loops that amplified TVL growth on the way up accelerate outflows on the way down.

This is an excerpt from The Block's Data & Insights newsletter. Dig into the numbers making up the industry's most thought-provoking trends.