In this work, we study the subsidence of Dallol, an explosive crater and hydrothermal area along the spreading Erta Ale ridge of Afar (Ethiopia). No volcanic products exist at the surface. However, a diking episode in 2004, accompanied by dike-induced faulting, indicates that Dallol is an active volcanic area. The 2004 diking episode was followed by quiescence until subsidence started in 2008. We use InSAR to measure the deformation, and inverse, thermoelastic and poroelastic modelling to understand the possible causes of the subsidence. Analysis of InSAR data from 2004–2010 shows that subsidence, centered at Dallol, initiated in October 2008, and continued at least until February 2010 at an approximately regular rate of up to 10 cm/year. The inversion of InSAR average velocities finds that the source causing the subsidence is shallow (depth between 0.5 and 1.5 km), located under Dallol and with a volume decrease between −0.63 and −0.26 × 106 km3/year. The most likely explanation for the subsidence of Dallol volcano is a combination of outgassing (depressurization), cooling and contraction of the roof of a shallow crustal magma chamber or of the hydrothermal system.