The crypto market is still reeling from the aftershocks of the October 10 flash crash that liquidated over $19 billion in positions across exchanges. As traders assess the damage, OKX founder Star Xu has stepped forward with a serious warning about the risks surrounding Ethena’s USDe — a token often described as a stablecoin but, according to Xu, far from being one.

Xu believes that viewing USDe as a fully stable, dollar-pegged asset could expose the entire cryptocurrency ecosystem to a new kind of systemic risk. Instead, he insists that USDe should be treated as a “tokenized hedge fund,” reflecting its underlying mechanisms rather than a simple 1:1 dollar peg.

Star Xu’s Warning to the Market

In a post shared shortly after the market crash, Xu said that the misunderstanding of USDe’s nature played a role in amplifying the panic that swept through the markets. While he acknowledged being an early investor in Ethena, Xu emphasized that the token’s structure does not make it suitable for stablecoin classification.

“It’s important to remind the market that USDe should not be viewed as a 1:1 pegged stablecoin — it’s a tokenized hedge fund,” Xu explained. He added that without strong risk controls, the design could lead to cascading failures similar to those witnessed during last Friday’s meltdown.

“Treating USDe as a simple 1:1 stable asset could introduce systemic risks to the entire crypto industry in the future,” he said.

The Binance De-Peg Incident

Ethena’s USDe briefly lost its peg on October 10, falling as much as 35% on Binance before recovering. Although the event was labeled an “isolated” occurrence by Ethena’s founder Guy Young, the ripple effects were anything but contained.

Young attempted to reassure users by stating that the incident was not a “true de-peg,” attributing the price swing to Binance’s internal order book imbalance. However, the temporary collapse in USDe’s value triggered widespread liquidations across leveraged positions, as traders’ collateral dropped below safety thresholds.

Within minutes, billions of dollars in positions were wiped out. By the end of the day, analysts estimated that more than $19 billion in positions had been liquidated — a record-breaking figure that surpassed the FTX collapse and the COVID-19 crash.

A Nightmare for Leveraged Traders

For many traders, the Binance de-peg served as a harsh reminder of the dangers of excessive leverage and thin liquidity. With order books drying up, automated systems struggled to find buyers for liquidated assets, accelerating the price decline.

Altcoins suffered the most, with several tokens losing over 90% of their value during the panic. Access to Binance also became unstable during the event, preventing market makers from stepping in to stabilize prices.

Haseeb Qureshi, a partner at venture capital firm Dragonfly, described the situation vividly: “It’s like a fire broke out on Binance, but all of the roads were blocked and firefighters couldn’t make their way in. This caused a wildfire to break out on Binance, but pretty much everywhere else.”

On decentralized trading platforms such as Hyperliquid, automated risk management systems activated swiftly. Auto-deleveraging (ADL) mechanisms closed out positions at steep penalties to prevent cascading insolvencies, showcasing how on-chain protocols can enforce stability during times of market chaos.

Binance Compensation and Market Recovery

In the aftermath of the crash, Binance confirmed that it had compensated affected users with over $280 million. The payments mainly targeted traders who used coin-margined positions — collateralized using USDe and other cryptocurrencies.

Despite the rapid recovery of some assets, including Ethena’s native token ENA, which rebounded over 10% after the incident, overall market sentiment remained cautious. Analysts pointed out that while the broader crypto market began to stabilize, the memory of how quickly things unraveled would likely linger for months.

A Stress Test for the Entire Industry

Many analysts view the October 10 crash as a critical wake-up call for the industry — a stress test that exposed deep vulnerabilities in crypto’s interconnected systems. Stablecoins and pseudo-stable assets like USDe have become integral to trading infrastructure, and misclassifying them could have dangerous consequences.

For Xu and other industry veterans, the key lesson is that transparency and risk management must evolve alongside innovation. “The crash was painful, but it was also necessary,” commented one market strategist. “It reminded everyone that not every asset labeled ‘stable’ is truly risk-free.”

The Road Ahead for Ethena and USDe

Ethena’s USDe has drawn both praise and scrutiny for its hybrid design, which blends delta-hedging strategies with on-chain collateralization. The approach aims to create a synthetic dollar-denominated asset without relying on traditional banking systems. However, critics argue that the model’s dependence on market hedging makes it inherently fragile during periods of volatility.

In response to the recent controversy, Ethena’s team has promised to review its risk protocols and engage more transparently with the community. Market participants are calling for clearer disclosure of how the peg is maintained, as well as improved contingency plans to avoid similar incidents in the future.

Lessons for the Broader Crypto Ecosystem

The flash crash and USDe’s de-peg underline a critical reality for the crypto world — systemic risk can emerge not just from centralized exchanges but also from the instruments traders use every day. As stablecoins and synthetic assets play an increasingly important role in the digital economy, distinguishing between their underlying mechanisms becomes essential.

The debate around USDe also echoes broader regulatory concerns. Financial authorities have long warned that assets marketed as “stable” could pose systemic threats if their reserves or risk management strategies are not transparent. The October 10 crash may push regulators to examine the growing class of algorithmic and synthetic stable assets more closely.

For now, traders and investors are adopting a more cautious stance. While the market has shown resilience with partial recoveries across key assets, the psychological scars from the crash remain fresh. The incident serves as a reminder that in the fast-evolving crypto landscape, innovation and risk often travel together — and misjudging one can destabilize the entire system.