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The sharp downturn in the crypto market on October 10 has exposed significant vulnerabilities across the decentralized finance (DeFi) ecosystem. According to a report by Sentora Research, nearly $1 billion in DeFi positions tied to Ethena’s staked USDe (sUSDe) are now at risk following a dramatic decline in yields.
The crash, which saw Bitcoin (BTC) tumble to around $113,000 and triggered widespread liquidations across major tokens, has caused borrowing and staking rates in DeFi markets to shift unfavorably. This change has made once-profitable leveraged strategies—like the sUSDe loop trade—potentially unsustainable.
What Are sUSDe Loop Trades?
Ethena’s sUSDe is a staked version of its synthetic dollar stablecoin, USDe, which earns yield by staking the underlying asset. Traders often use a looping strategy to amplify returns: they deposit sUSDe as collateral on platforms such as Aave or Pendle, borrow stablecoins like Tether (USDT) or USD Coin (USDC), and use the borrowed funds to purchase more sUSDe.
This newly acquired sUSDe is redeposited as collateral, allowing traders to repeat the cycle multiple times. The goal is to maximize yield from the “positive carry” — the difference between sUSDe staking rewards and the borrowing costs on the lending platform.
In bullish market conditions, this strategy can produce strong returns. However, it also introduces high leverage and risk — particularly when borrowing costs rise or staking yields fall.
Negative Carry Turns Profitable Trades Risky
Sentora Research warns that this delicate balance has now flipped. Following the October market crash, DeFi borrowing rates have increased while staking yields have declined, turning the once-profitable carry negative.
“Following the flash crash on October 10, funding rates on DeFi markets have dropped significantly, cutting yields for basis-trade strategies,” Sentora wrote in a note shared with CoinDesk. “On Aave v3 Core, USDT/USDC borrow rates sit around 2.0% and 1.5% higher than the sUSDe yield, turning the carry negative for users borrowing stables to lever sUSDe.”
With yields now lower than borrowing costs, leveraged traders are effectively losing money each cycle instead of earning yield. As a result, Sentora estimates that nearly $1 billion in looped positions may be at risk of unwinding if conditions persist.
Threat of Liquidations and Market Impact
The report highlights that a prolonged negative spread between borrowing costs and sUSDe yields could trigger a wave of forced deleveraging or collateral sales, which might reduce liquidity and increase volatility across the DeFi ecosystem.
Sentora Research also noted that many existing positions on Aave and Pendle are approaching critical thresholds. A number of looped trades are now within 5% of liquidation, suggesting that even minor rate fluctuations could trigger margin calls or forced sales.
This dynamic could set off a cascading effect, as liquidations further drive up borrowing costs and strain liquidity in lending pools — a cycle that could amplify price instability.
Broader Implications for DeFi
The situation underscores a broader issue in DeFi: the fragility of leveraged yield strategies. As markets mature, many traders have turned to looping and leverage to chase higher returns. But as this case shows, these trades are highly sensitive to changes in market conditions.
With the Federal Reserve’s monetary policy decisions and market liquidity shifts continuing to influence global borrowing rates, yield-based strategies could face more volatility in the months ahead.
The DeFi market, which once promised steady passive income through complex yield strategies, is now confronting the risks of over-leverage and dependency on favorable funding conditions.
Conclusion
The October Bitcoin crash has rippled far beyond spot prices, exposing the fragility of leveraged DeFi strategies like the sUSDe loop trade. With nearly $1 billion in positions hanging in the balance, traders are facing a crucial test of risk management and market discipline.
If borrowing rates remain elevated and yields stay compressed, many leveraged positions could unwind, potentially leading to further liquidity stress and price instability across DeFi markets.
For now, the message from Sentora Research is clear: watch the borrowing-yield spread closely — because if it stays negative, the loop could soon break.
