Over the past month, the stablecoin market has been unusually turbulent.
From xUSD to USDX to deUSD, and then the bad-debt contagion affecting protocols like Euler, Stream, Compound, and Aave, both the stablecoin sector and the broader on-chain ecosystem are undergoing a systemic stress test.
At the core is a simple fact: the mechanisms behind stablecoins are exposing previously hidden risks. This reinforces a key point — stablecoins are not naturally stable; they rest on a fragile equilibrium shaped by design choices and incentives.
This article examines the recent wave of depegging from both Web3 and TradFi perspectives, and highlights the critical warnings for anyone building on or relying on stablecoins.
1. When Stable Breaks: Growth, Fragility, and Rising Risk Exposure
As one of the long-sought “holy grails” of crypto, stablecoins have always been among the most imaginative and high-potential segments of the market.
Since DeFi Summer in 2020, the explosion of DeFi-native use cases — collateral, strategies, lending, yield pools — has created strong, organic demand. Stablecoins rapidly became core infrastructure for expanding on-chain balance sheets, while their mechanisms diversified: from early over-collateralized models like DAI, to boom-and-bust algorithmic designs like UST, and now to increasingly complex, structured, delta-neutral products such as USDe and XUSD.
After years of expansion, CoinGecko data shows that as of November 14, the total circulating supply of stablecoins exceeded 300 billion USD. USDT led with 183.9 billion USD, followed by USDC at 75.7 billion USD. Together, they made up nearly 260 billion USD and continue to dominate the market.
Source: CoinGecko
With more than 300 billion USD in market cap, strong ongoing growth, massive collateral demand, and growing influence on traditional finance and payments, stablecoins can no longer escape regulatory scrutiny.
As they permeate global payments, DeFi activities, and “safe-haven” use cases, stablecoins have long ceased to be a single, neatly defined concept. For some users, they are the primary tool for cross-border transfers; for others, they serve as core components of on-chain yield strategies. Still others view them as yield-bearing savings instruments or key collateral assets in DeFi protocols.
At a more macro level, stablecoins are beginning to function as “digital deposits” and “on-chain settlement units.” Their usage is inherently context-driven — different people, different needs, different mechanisms. Each design balances three competing goals: decentralization, capital efficiency, and credit backing, and each trade-off produces a very different risk profile. (Further reading: Stablecoins, Simplified: A Practical Framework for User Needs)
In other words, stablecoins have effectively become systemic financial intermediaries on-chain. And when they fail, the impact can spread far more widely than most people expect. That’s why the recent issues around xUSD, USDX, deUSD and similar assets have drawn such widespread attention.
Against this backdrop, understanding stablecoin mechanisms, risk sources, and regulatory perspectives is no longer a niche topic — it has become a public issue that everyone in the ecosystem has a stake in.
2. From Algorithmic to Delta-Neutral: The Mirage of Decentralized Stablecoins
Today, centralized stablecoins like USDT and USDC remain within regulators’ field of view. In contrast, the speed and complexity of “mechanism-innovative” decentralized stablecoins have already moved beyond what current regulatory frameworks can meaningfully cover.
Most of the recent depegging events have occurred in stablecoins that rely on synthetic collateral or highly structured, delta-neutral mechanisms. These products pursue capital efficiency and yield innovation — but take on more complex, non-linear risks in return.
When discussing the risks of innovative decentralized stablecoins and the secondary effects they may trigger, it is impossible to avoid the example of Terra/UST. If UST’s 20% APY represented one of Web3’s most dangerous high-yield traps, then the main actors in this new wave are even more sophisticated: structured-product-like stablecoins.
The most representative examples are xUSD and USDX. Their core architecture typically consists of:
delta-neutral strategies + liquidity pools + derivatives-based hedging
On paper, this appears rational, professional, and grounded in financial engineering.
In practice, whether a stablecoin is algorithmic, synthetic-collateralized, or delta-neutral, the core risk points to the same issue: complex mechanisms can obscure underlying vulnerabilities.
That said, the “front half” of USDe — its issuance and stabilization mechanism — is materially different from Terra’s highly reflexive design. Its yield is primarily supported by leveraged long traders paying funding fees during bull markets, a more grounded and economically supported source of return.
The real concern lies in Ethena’s “back half”: what happens during a severe depeg scenario. Under stress, it could fall into a LUNA/UST-style negative spiral, triggering runs and accelerating collapse:
- funding rates turn negative and remain negative
- the negative spread widens
- market FUD grows
- USDe yields plunge and the token begins trading at a discount
- redemptions surge and market cap collapses
For example, if market cap were to fall from 10 billion USD to 5 billion USD, Ethena would need to close its short positions and redeem collateral (such as ETH or BTC). If anything goes wrong during that process — extreme volatility, liquidity shortages, slippage, or operational friction — USDe’s peg would come under even greater pressure.
Source: CoinMarketCap
This is exactly one of the key risks highlighted by the recent USDX incident. The October 11 event was a CEX-side issue and did not directly affect on-chain prices, but if a delta-neutral stablecoin like USDX holds most of its hedging positions on large CEXs, it becomes indirectly exposed:
Underlying asset loss transmission:
If underlying assets on the CEX side are impaired for any reason — mispricing, security incidents, liquidation-engine failures — this can affect the value of the issuer’s short positions and weaken their ability to liquidate collateral or unwind hedges.
Breaks in the liquidation chain:
When redemptions surge, the issuer’s reliance on CEXs for settlement can be slowed or eroded by slippage and operational friction, which ultimately shows up on-chain as a depeg.
Objectively, whether it is USDe, USDX or similar designs, delta-neutral stablecoins are closer to structured financial products than to simple digital cash. They require more granular regulatory frameworks, stronger transparency standards, and more robust, flexible reserves and risk buffers.
Put simply, no matter how the underlying mechanism changes, all stablecoins should face the same basic requirements on disclosure transparency, underlying asset quality and composition, and custody arrangements. “Mechanism innovation” is not an excuse to avoid regulation or obscure risk.
3. Stablecoin Evolution and the Need for Prudence
Zooming back out, the stablecoin sector has long been a highly profitable market, and its margins and potential scale pose a direct challenge to traditional finance (TradFi). That is one of the core reasons regulators are inevitably stepping in.
According to Tether’s Q2 2025 attestation, its total U.S. Treasury holdings exceeded 127 billion USD, up around 8 billion USD from Q1. Net profit for Q2 was roughly 4.9 billion USD, bringing net profit for the first half of the year to about 5.7 billion USD.
For a company with only around 100 employees, those figures are staggering. Its profitability and operational efficiency, relative to its headcount, are on a completely different order of magnitude from major crypto exchanges or large Web2 financial institutions. (Further reading: USDe’s Surge — Inside the ‘Satoshi-Dollar’ Playbook Behind a $14B Supply)
This kind of largely unchecked financial power and near-monopoly profit naturally raises regulatory concerns about systemic-risk transmission and monetary sovereignty. At the same time, for everyday users, stablecoins are increasingly becoming mass-market wealth-management tools that siphon deposits and attention from TradFi.
Whether or not you’re familiar with Web3, you have likely come across ads such as:
“Earn 12% APY on your USDC — flexible term.” This is not mere clickbait. It is typically a short-term subsidy campaign (e.g., Circle covering the rate), but it shows how on-chain yield dynamics are spilling over into mainstream savings and investment.
Objectively, this represents an emerging Web2 & Web3 convergence. But a smoother user experience does not translate into materially lower risk.
On the contrary, when everyday users, through a bank-like app interface, purchase DeFi structured products that lack deposit-insurance protection, rely on complex underlying mechanisms, and can face liquidation slippage at any moment, the mismatch between perceived safety and actual risk reaches its peak.
From LUNA/UST to USDe, xUSD, USDX and beyond, stablecoins have shifted from purely technical innovation to structural financial challenges. In the pursuit of efficiency and decentralization, they continually expose the fragility of their mechanisms.
At the end of the day, there is nothing inherently safe about a stablecoin. Its risk profile is defined by its mechanism design, collateral backing, transparency, and governance.
The recent depegs of xUSD and USDX are only the latest reminder. Under the lure of high yields and the cover of complex financial engineering, users must stay vigilant: Any digital financial product that promises “high yield with zero risk” deserves the most cautious, skeptical examination of its underlying structure and risk boundaries.
Only when innovation is paired with responsible transparency and embedded within an increasingly robust global regulatory framework can stablecoins truly achieve a sustainable future.