Core Viewpoint - The recent crash of the USDe stablecoin, which fell from $1 to $0.65 on Binance, raises questions about the stability of stablecoins in general, likening it to a "tulip bubble" collapse [1][6]. Summary by Sections USDe's Rise and Fall - USDe aimed to be a decentralized "synthetic dollar" not reliant on the banking system or dollar reserves, appealing to users in a fragmented crypto world [1]. - The high yields of USDe, reaching double digits in bull markets and up to 50% annualized in extreme conditions, attracted significant investment, leading to rapid growth in market capitalization [3][5]. - Following the passage of the U.S. "GENIUS Stablecoin Act," USDe's market cap surged, briefly surpassing other stablecoins like Dai [5]. Mechanism of USDe - USDe operates differently from centralized stablecoins, relying on market and algorithmic mechanisms for its stability rather than dollar reserves [8]. - Its stability mechanism involves a balance of collateral (ETH) and derivatives for hedging, which theoretically maintains its value around $1 [10]. - The introduction of "risk-free arbitrage" strategies during bull markets increased leverage, creating vulnerabilities that were exposed during market downturns [8][11]. Trigger for the Crash - The crash was triggered by a significant drop in Bitcoin and Ethereum prices, following comments from Trump about tariffs on Chinese imports, leading to a broader sell-off in risk assets [9]. - The market panic resulted in a liquidity crisis, exacerbated by the reliance of USDe on dynamic hedging mechanisms that failed under extreme volatility [11][12]. Market Structure and Implications - The crash primarily occurred on Binance, the largest derivatives market, where the rapid depletion of buy orders led to a sharp price drop [13]. - Other exchanges experienced limited price fluctuations due to more stable trading structures, indicating that the issue was more about market microstructure than a systemic failure of stablecoins [15][14]. Trust and Stability of Stablecoins - The incident highlights that the stability of algorithmic stablecoins like USDe is contingent on market liquidity rather than actual dollar reserves, making them vulnerable in unstable conditions [16]. - The article raises critical questions about the reliability of both algorithmic and reserve-backed stablecoins, emphasizing that trust is the fundamental underpinning of their value [22][24]. - Historical parallels are drawn to the collapse of the gold standard and the Bretton Woods system, illustrating that trust in the backing asset is crucial for stability [19][21].