USDX Depegging Crisis Deep Dive: Structural Risks of Delta-Neutral Stablecoins and Their Future Path
USDX is a synthetic stablecoin issued by Stables Labs that adopts a delta-neutral strategy. On November 6, it suddenly experienced a severe depeg, plunging from 1 USD to below 0.60 USD — a drop of more than 40%. The trigger was abnormal activity from an address directly linked to the project’s founder, Flex Yang. Ignoring borrowing rates as high as 800% APY, the address aggressively borrowed all available stablecoins (including USDT, USDC, USD1, and others) on DeFi platforms such as Euler and Lista DAO using USDX and sUSDX as collateral, and immediately transferred them to centralized exchanges like Binance. Once no further borrowing was possible, the address proceeded to dump large amounts of USDX on PancakeSwap in exchange for USDT. This cost-insensitive “escape” behavior sparked panic across the market.
The USDX depegging incident exposed the structural vulnerabilities of synthetic stablecoins — their delta-neutral strategies are executed off-chain on centralized exchanges, creating opaque “black-box” operations. The expansion of the strategy into altcoins further amplified risk. Unlike USDe, which temporarily depegged earlier this year but quickly recovered, USDX lacks transparent reserve disclosures and third-party audits, and the team has yet to provide a clear explanation for the depeg.
This incident reinforces a key lesson: within DeFi’s complex environment of protocol nesting and leveraged stacking, stablecoin projects lacking transparency and regulatory compliance are highly susceptible to confidence shocks during periods of market stress. Such failures can rapidly lead to insolvency and significant user losses.
Reasons Behind the USDX Stablecoin Depegging
Direct Trigger Factors
Abnormal operations by an address associated with the founder:
A wallet address directly linked to Stables Labs founder Flex Yang (starting with 0x50de) began showing clear “exit” behavior starting in late October. Since late July, this address had been receiving USDT transfers from another address starting with 0x246a (labeled by Arkham as Flex Yang) and forwarding them to Binance. More critically, despite borrowing rates reaching as high as 800% APY, the address aggressively borrowed stablecoins (USDT, USDC, USD1, etc.) from multiple DeFi platforms including Euler, Lista DAO, and Silo using USDX/sUSDX as collateral, and immediately transferred the borrowed funds to centralized exchanges like Binance. After exhausting all possible borrowing capacity, the address proceeded to dump large amounts of USDX on PancakeSwap in exchange for USDT. This cost-insensitive behavior directly triggered market panic. Such actions clearly defy normal business logic — no rational investor would choose to borrow at such exorbitant rates unless facing an urgent liquidity crisis.
Market liquidity exhaustion and cascading effects:
The abnormal operations resulted in the depletion of all assets that could be borrowed using USDX/sUSDX as collateral across DeFi markets, including USDT, YUSD, USD1 in Euler’s Re7 Labs Cluster, and even WBNB and BTCB. On Lista DAO, borrowing rates for USDT against sUSDX collateral surged above 800%, and if borrowers continued to avoid repayment, the rates would keep rising until forced liquidation. Liquidity pools for USDX on DEXs such as PancakeSwap experienced severe imbalance. Although Stables Labs’ multisig address removed nearly USD 20 million of liquidity and later added back USD 10 million two days earlier, it still failed to stop the liquidity crisis from spreading. Large sell orders, amplified by insufficient liquidity, caused massive slippage and further accelerated the depegging process.
Fundamental Structural Issues
Inherent flaws of the delta-neutral strategy and amplified risks:
USDX adopts a delta-neutral hedging strategy similar to Ethena’s, but expands its scope from Bitcoin and Ethereum into altcoins. While this approach can amplify returns in a bull market, it also significantly increases risk exposure. During extreme market events such as the “10.11 crash,” this strategy becomes highly vulnerable to ADL (auto-deleveraging) or hedge failure, resulting in losses on collateral assets. As demonstrated in the xUSD collapse, delta-neutral strategies can incur collateral losses during extreme volatility due to ADL; risks accumulated through outsourcing strategies to third parties for off-chain execution and through recursive leverage ultimately exploded when the third-party operator incurred nearly USD 100 million in losses. The problem with USDX is that it not only inherits the inherent risks of such strategies but further amplifies them by extending exposure to altcoins.
Opaque “black-box” operations and information asymmetry:
USDX executes most of its hedging strategies off-chain on centralized exchanges, creating severe information asymmetry. Although the official website still reports more than USD 680 million in reserve assets (with Binance accounting for the majority), the authenticity of this data cannot be verified due to the opacity of centralized exchanges. This stands in sharp contrast to Ethena’s USDe, which regularly publishes third-party reserve attestations and maintains a collateralization ratio above 120%. USDX lacks regular third-party audits and real-time proof-of-reserves mechanisms. This “black-box” model means that no one except the project team knows the actual asset status or hedge performance, leaving investors to rely on speculation and fear when abnormal market movements occur.
Governance deficiencies and failure of risk-control mechanisms:
Stables Labs exhibits notable governance flaws. The project delegated large amounts of capital to third parties for off-chain operations without effective oversight or risk-management frameworks. While recursive leverage strategies can improve capital efficiency under normal conditions, they also magnify losses in extreme scenarios. When third-party operators incur losses, these risks quickly cascade through the entire system. Even worse, key decision-making appears to be highly centralized in the hands of the founder. Once an address associated with the founder began behaving abnormally, the credibility and stability of the entire project suffered a fatal blow. This centralized governance structure runs counter to the ethos of decentralized finance and lacks effective checks and balances.
Systemic Risk Factors
Complex protocol nesting and risk transmission across DeFi:
USDX is widely used as collateral across DeFi protocols, forming a complex web of interconnected risk transmission pathways. Of particular note is that Re7 Capital and MEV Capital have both built markets for USDX as well as for xUSD — the stablecoin that recently collapsed. This high degree of correlation means that when one project encounters issues, risks can quickly propagate to related systems. Leveraged stacking across protocols makes it difficult to accurately assess true risk exposure. For example, crvUSD can be used as an underlying asset to mint another stablecoin, which can then be used again to mint crvUSD. Such deeply nested structures mean that even with all information transparently on-chain, it is nearly impossible to determine how many layers of leverage exist on a single underlying asset. Once USDX began to depeg, all DeFi strategies and lending positions using it as collateral were hit, creating a systemic chain reaction.
Crisis of market confidence and fear contagion:
In the wake of xUSD’s collapse caused by a failed delta-neutral strategy, the market was already skeptical of stablecoins built on similar mechanisms. The USDX depegging occurred during an extremely sensitive period, when investors had significantly heightened awareness of the risks associated with such “synthetic stablecoins.” Abnormal behavior from an address tied to the founder further intensified panic — especially after the market realized that Flex Yang is not only the founder of Stables Labs but also the former founder of Babel Finance and HOPE, both carrying negative historical baggage. The team’s failure to deliver timely and transparent crisis communication — and the continued absence of a clear explanation — allowed the confidence crisis to persist and spill over into the broader DeFi ecosystem.
Regulatory environment and compliance risks:
Compared to traditional stablecoins such as USDT and USDC, synthetic stablecoins like USDX face significant disadvantages in regulatory compliance. Issuers of traditional stablecoins, such as Circle, actively embrace regulation, undergo routine audits, and regularly disclose the composition of their reserves — building strong credibility among institutional investors. USDX, despite claiming to be a MiCA-compliant stablecoin issuer, operates in a manner that diverges substantially from a conventional stablecoin and more closely resembles a structured financial product. In an increasingly stringent regulatory climate, this ambiguous positioning heightens compliance risks and limits USDX’s acceptance within institutional markets.
Market Microstructure Analysis
Liquidity provision mechanisms and incentive imbalance:
USDX’s liquidity across various DEXs relies primarily on liquidity provided by the project team and participation from external liquidity providers. When abnormal market conditions arise, external liquidity providers often withdraw their liquidity rapidly to avoid losses, leading to a sharp contraction in overall liquidity. Although the project attempted to stabilize prices by adjusting liquidity positions, such efforts proved insufficient in the face of large-scale sell-offs. Flaws in the liquidity incentive design meant that liquidity was most scarce precisely when it was needed the most, creating a self-reinforcing negative cycle.
Arbitrage mechanism failure and distorted price discovery:
Under normal conditions, when USDX deviates from its peg, arbitragers can profit by purchasing discounted USDX and redeeming it for an equivalent amount in dollars — a process that helps restore price stability. However, once the market began doubting the integrity of USDX’s underlying assets, arbitragers feared that the redemption mechanism might fail and therefore refrained from participating. This caused the usual price discovery mechanism to break down, with USDX’s price reflecting market panic rather than its intrinsic value. Abnormal operations by the founder-associated address further distorted price signals, making it impossible for the market to accurately assess the true value of USDX.
What Is a Delta-Neutral Stablecoin?
Definition of a Delta-Neutral Stablecoin
A delta-neutral stablecoin is an innovative type of stablecoin built on a Decentralized Reserve Protocol (DRP), which maintains price stability through a delta-neutral hedging strategy. The core concept is to ensure that the overall value of the reserve pool is unaffected by fluctuations in the prices of underlying assets, thereby preserving the stablecoin’s 1:1 peg to the U.S. dollar. This model addresses the reserve deficit problems faced by traditional DRP stablecoins when collateral asset prices experience volatility.
How It Works: A Triple-Yield Structure
Delta-neutral stablecoins typically adopt a “three-layer yield composition” model:
- Holding spot crypto assets such as BTC or ETH,
- Shorting an equivalent notional value of coin-margined perpetual futures, and Earning on-chain yields through staking or similar mechanisms.
The +1 delta from holding spot assets and the –1 delta from shorting perpetual contracts offset one another, resulting in an overall portfolio delta of zero. This ensures that the reserve pool’s dollar-denominated value remains stable regardless of movements in crypto asset prices.
Core Profit Mechanism: Funding-Rate Arbitrage
The primary source of profit for delta-neutral stablecoins is funding-rate arbitrage, a mechanism unique to perpetual futures. When there are more long positions than short positions, longs pay funding fees to shorts to maintain alignment between spot and derivative prices. Historically, funding rates have been positive for the majority of the time. Backtested data indicates that this strategy has consistently generated an annualized return of 7%–10% across all historical years, providing additional yield for stablecoin holders.
Two Primary Implementation Approaches
Approach 1: Direct Hedging Model (UXD, Pika, Ethena, USDX)
The direct hedging model is the most straightforward implementation of a delta-neutral strategy, where the protocol acts as a professional arbitrage trader. When users mint the stablecoin, the protocol uses the deposited funds to purchase an equivalent value of spot crypto assets (such as BTC or ETH) while simultaneously opening an equivalent short perpetual futures position on centralized or decentralized derivatives exchanges, thereby forming a perfectly delta-neutral portfolio.
For example, in Ethena’s model, when a user deposits 1,000 USDC, the protocol purchases USD 1,000 worth of ETH spot and opens a short position of equal notional size. Regardless of whether ETH rises or falls, gains on the spot asset and losses on the short futures position offset each other completely — while the protocol continually earns funding-rate income, which is distributed to users.
The advantages of this model lie in its simplicity, transparency, and ease of user understanding. However, it requires a sophisticated risk management team, and its hedging activities depend heavily on external exchanges, introducing counterparty risk as well as ADL (auto-deleveraging) risk.
Approach 2: Built-in Derivatives Market Model (Angle Protocol, Liquity V2)
The built-in derivatives market model is more complex and innovative. In this design, the protocol itself functions as a derivatives trading venue, eliminating reliance on external exchanges for hedging. Users can open long positions within the protocol to gain price exposure, while the protocol naturally assumes the corresponding short positions, maintaining an overall delta-neutral state.
Taking Angle Protocol as an example: when users want exposure to BTC, they deposit margin and open a long position directly within the protocol. The margin collected is used to support stablecoin issuance, while the short exposure borne by the protocol is offset by losses suffered by long users — when BTC falls, losses on user longs are transferred to the protocol’s reserves, helping maintain the stablecoin’s stability.
The advantage of this model is that it is fully decentralized, does not rely on external exchanges, and offers superior composability. The challenges, however, include the need for sufficient user participation to maintain a balanced long-short ratio, and the significantly higher design complexity, which requires finely tuned risk parameters and robust system-level safeguards.
Pros and Cons of Delta-Neutral Stablecoins
Key Advantages
High Yield Potential
The biggest advantage of delta-neutral stablecoins is their ability to offer stable and attractive returns to holders. Through funding-rate arbitrage, historical data shows annualized yields of 7%–15%, far exceeding the zero-yield nature of traditional stablecoins and typical bank deposit rates. For example, Ethena’s USDe achieved annualized returns above 20% during bull markets, providing DeFi users with an appealing source of passive income.
High Capital Efficiency
Compared with CDP models like MakerDAO, which require 150%–200% over-collateralization, delta-neutral stablecoins can theoretically achieve a 1:1 or near-1:1 collateral ratio, significantly improving capital efficiency. Users do not need to lock large amounts of excess collateral to mint stablecoins, freeing up more liquidity for use in other DeFi activities.
Degree of Decentralization
In particular, the built-in derivatives market model operates entirely on-chain, without relying on centralized institutions for issuance or redemption, aligning closely with DeFi’s core decentralization principles. Users can participate without KYC or geographic restrictions, enabling true financial freedom.
Key Drawbacks
Complex Risk Exposure
Delta-neutral stablecoins face multiple layers of complex risks. The most significant is ADL (auto-deleveraging) risk: in extreme market conditions, exchanges may force-close positions, causing hedges to fail. There is also funding-rate reversal risk, which — while rare — may result in sustained losses. Additional risks include liquidity risk, basis risk, and operational risk. The USDX depegging incident is a typical example of these risks compounding and triggering systemic failure.
Centralization Dependence
The direct hedging model relies heavily on centralized exchanges to execute hedge positions, introducing counterparty risk, regulatory risk, and single-point-of-failure risk. If major hedging venues encounter problems (e.g., the collapse of FTX), the entire delta-neutral mechanism may break down. Even decentralized built-in derivatives models often require external dependencies such as oracles.
Liquidity and Scalability Constraints
The scalability of delta-neutral stablecoins is constrained by derivatives market liquidity. As the stablecoin supply grows, larger short positions must be opened in derivatives markets. However, market depth is finite, potentially leading to increased slippage and higher hedging costs. In extreme market conditions, derivatives market liquidity may dry up, preventing hedges from being executed effectively.
Governance and Transparency Risks
The complexity of delta-neutral strategies makes it difficult for ordinary users to fully understand or monitor protocol operations. Key decisions — such as risk parameter configuration and hedging adjustments — are often controlled by a small number of team members, creating governance centralization risk. Furthermore, especially under the direct hedging model, most operations occur off-chain, lacking real-time transparency.
Yield Instability
Although funding rates have historically been positive for most of the time, their volatility is significant, and extended periods of negative funding are possible. During bear markets or periods of extreme pessimism, funding rates may turn negative, causing delta-neutral strategies to incur losses instead of generating yield, undermining the stablecoin’s long-term sustainability.
Major Delta-Neutral Stablecoin Projects with a Market Cap Above $50 Million
Merits of USDX Stablecoin Operations and Innovation
Given USDX’s strong early market response and relatively active ecosystem collaboration and multi-chain expansion, there are certain merits in its operations, maintenance, and innovation. These can be studied in depth from the following aspects:
- Stability Maintenance and Risk Management
- Multi-Chain Expansion and Liquidity Optimization
- Yield-Sharing Incentive Mechanism
- Ecosystem Bridging and Community-Driven Development
Summary
The USDX depegging crisis is not merely an isolated project failure but a concentrated manifestation of the structural challenges facing the entire delta-neutral stablecoin sector. From the perspective of direct triggers, the abnormal actions of the founder-associated address exposed the project’s centralized governance flaws and the failure of its risk control system. From a fundamental analysis standpoint, the inherent complex risk exposure of delta-neutral strategies, the opaque off-chain operational model, and the intricate interconnections among DeFi protocols together form a fragile risk transmission network. Especially during the sensitive period following the collapse of xUSD, market trust in such “synthetic stablecoins” was already weak, and the USDX incident further intensified investor skepticism toward the entire delta-neutral stablecoin model. This event once again demonstrates that, while pursuing high yields, a lack of transparency, decentralized governance, and effective risk management mechanisms can ultimately lead to a systemic trust crisis.
Despite these challenges, delta-neutral stablecoins remain a promising direction for DeFi innovation, with the key being how to balance yield and safety. Successful projects require several core elements: first, establishing transparent reserve proofs and real-time monitoring mechanisms so that users can verify the protocol’s true status; second, implementing an effective decentralized governance structure to prevent critical decisions from being overly concentrated in the hands of a few; third, building a multi-layered risk management system, including insurance funds, emergency pause mechanisms, and progressive risk exposure management. From a technical approach perspective, the built-in derivatives market model offers better decentralization and composability compared with the direct hedging model, but it must address challenges related to liquidity guidance and user education.