The stress test of the crypto derivatives market came unexpectedly. Last week's black swan-level liquidation event once again brought the fragility of the derivatives market to the forefront:
ETH's open interest contracts plummeted by $2.3 billion in a single day, and the total contract position on the network evaporated by over $14 billion, setting a record for the largest single-day decline.
This extreme market situation, however, unexpectedly became the best experimental field to test the hedging-type stablecoin model.
Market Circuit Breaker: ETH Contracts at the Center of the Storm
This liquidation event exhibited pronounced structural characteristics: although the size of the BTC contract market is twice that of ETH, the weekly decline in ETH's open interest reached 25% (a reduction of $5 billion), far exceeding the loss ratio of BTC. From February 2 to 3 alone, the ETH contract position decreased by $2.3 billion in a single day, accounting for 16.4% of the total network decline. On-chain data shows that this asymmetric selling pressure may stem from the concentrated unwinding of leveraged positions embedded in the Ethereum ecosystem (such as LST re-pledging, DeFi protocol margin positions, etc.).
Exchange data shows that the scale of this round of liquidations has a significant statistical bias. The liquidation amount reported by third-party platforms like Coinglass is only $2.3 billion, but the founders of leading exchanges estimate the actual loss may have reached $8-10 billion based on internal data. This difference may be due to the data push limitations of exchange APIs, resulting in some forced liquidations not being captured in real-time. Taking Bybit as an example, its officially disclosed liquidation volume ($2.1 billion) far exceeds the $333 million recorded by Coinglass. If this logic is extrapolated, this event may be the largest derivatives crisis in crypto history in terms of actual liquidation scale.
Is the Peg of Stablecoins Dependent on Mechanism or Luck?
Against the backdrop of rapidly shrinking market liquidity, users' attention has inevitably turned to the peg performance of stablecoin protocols. To my surprise, some protocols have managed to gain additional profits through clever strategies during the market sell-off. As most leveraged players fell in the liquidation wave, Ethena's synthetic USD stablecoin USDe actually carried out a counter-trend operation: its 24-hour redemption volume reached $50 million, and its secondary market trading volume exceeded $350 million, with the price spread to USDT always anchored within the ±0.1% range. The price curve shows that USDe's performance is highly synchronized with fiat-backed stablecoins like USDC and DAI, and the coordinated action of CEX market makers and on-chain arbitrageurs has effectively offset the short-term liquidity shocks.
USDe price compared to USDC (red) and DAI (purple)
Theoretically, when the price of ETH perpetual contracts is deeply discounted compared to the spot (the maximum discount on Binance contracts was 5.8% in this case), the unrealized profits of short positions form a natural buffer. The protocol converts a portion of these profits into realized gains through an auto-liquidation mechanism, thereby providing an additional APY boost for holders. Ethena is one such case: data shows that it captured $500,000 in profits through this strategy last week, contributing a 50 basis point weekly APY increase to sUSDe holders.
The core mechanism supporting this stability lies in its unique "spot + perpetual contract short" hedging combination.
The Double-Edged Sword Effect of Perpetual Contract Strategies
Reviewing this event, we can see that the key bottleneck of the perpetual contract strategy has been exposed: when the ETH funding rate continues to decline (in some periods lower than BTC contracts), the revenue model solely relying on funding rates faces challenges.
In response, Ethena's solution is to initiate dynamic rebalancing, transferring over $1 billion in collateral from perpetual contracts to on-chain stablecoin yield markets (some pools reaching 8.75% APY) such as Morpho and Aave. This "yield radar" mode allows it to maintain a basic yield rate even during periods of low funding rates. However, the sustainability of this strategy remains to be observed. When the market enters a deep bear market, stablecoin yields may shrink as borrowing demand declines, while the losses from perpetual contract negative funding rates may intensify. In such a scenario, how can the protocol maintain its yield attractiveness?
Another point of contention is the cross-exchange execution risk. The discount on Binance's ETH contracts (5.8%) was far greater than platforms like Bybit and OKX (around 1%), resulting in Ethena's short profits being highly concentrated on a single exchange. Although its automated system claims to capture cross-platform price differences, issues such as exchange API throttling and withdrawal delays in extreme market conditions may still erode the arbitrage space.
The "Blockchain Trilemma" of Derivatives Stablecoins?
Nevertheless, Ethena's experiment provides a new approach for the algorithmic stablecoin track: by hedging spot volatility with perpetual contracts, it may create a more capital-efficient pegging mechanism than over-collateralization; and the dynamic collateral pool design attempts to strike a balance between yield, liquidity, and security.
However, this stress test also reveals potential risks:
1. Liquidity coupling risk: when multiple exchanges experience deep discounts simultaneously, the concentrated unwinding of short positions may exacerbate price spread volatility;
2. Yield source dependence: current yields come from perpetual contract spreads and on-chain stablecoin lending, both of which are positively correlated with market risk appetite;
3. Black swan resilience: if cross-exchange, cross-asset liquidity depletion occurs (such as the March 2020 crash), the hedging combination may face collateral contagion risks.
The Test Has No Ending
In this historic liquidation event, stablecoins like USDe have exhibited surprising stability, but their true test may not have arrived yet. Once the market enters a prolonged period of low volatility and negative funding rates, can this derivatives-hedging model continue to generate sustainable yields? The answer may have to wait for the arrival of the next Crypto Winter.
At least, this test has proven one thing: in the valley of death for algorithmic stablecoins, what may survive the bull and bear cycles may not be the most perfect design, but the most adaptable survival strategy.
