Yield Compression Sparks DeFi Unwinding Crisis: USDe TVL Drops by 50%

The total value locked (TVL) in Ethena's

stablecoin protocol has dropped by half to $7.6 billion, when it reached $14.8 billion. This sharp contraction, caused by a rapid decrease in yields and the unwinding of leveraged trades, has sparked debate about the long-term viability of yield-generating stablecoins within decentralized finance (DeFi) .

The turmoil started when USDe’s annual percentage yield (APY) slid from double digits to 5.1%,

, which are still around 5.4%. This led to a negative carry, that used staked USDe (sUSDe) as collateral. The resulting wave of liquidations sped up the TVL decline, as traders using leverage faced margin calls and the value of sUSDe collateral dropped .

This downturn exposes the vulnerability of leverage-based strategies in DeFi. Many participants had used looping—repeatedly borrowing

against sUSDe to amplify their exposure—as long as USDe’s APY stayed above borrowing costs . But as yields fell, these strategies became loss-making, . The deleveraging has been made worse by wider issues in DeFi, including the closure of yield-farming projects and .

Even with the TVL slump,

, with transaction volumes exceeding $50 billion last month. The stablecoin keeps its $1 value by holding spot crypto as collateral and hedging with short positions in perpetual futures . However, and recent losses in Ethereum-based treasuries—such as Bitmine’s $4.1 billion in unrealized ETH declines—have heightened risk.

Regulatory shifts could further influence USDe’s future. Anchorage Digital, a federally regulated crypto bank, has introduced a rewards program for USDe and USDtb holders under the GENIUS Act, which bans yield-paying stablecoins. By distributing rewards through a separate entity, Anchorage seeks to remain compliant with U.S. law while still incentivizing token holders. This strategy may become a model for other stablecoin issuers adapting to changing regulations.

The TVL plunge highlights broader dangers for those investing in stablecoins. As yields return to normal,

and maintaining sound collateral and liquidation systems. For now, , and any rebound will depend on yield stabilization, better market conditions, or protocol improvements.