Could Stablecoin Ethena (USDe) Collapse Like Terra LUNA? CryptoQuant Investigates
Emerging stablecoin Ethena (USDe) poses unique risks for holders compared to other dollar-denominated tokens, argued CryptoQuant in a new report on the matter.
Boasting a market cap of over $2.3 billion today, Ethena emerged in late February and quickly became the fastest-growing stablecoin in history. One of its most attractive features is that it generates yield for its holders, unlike leading stablecoins whose issuers keep all profits for themselves.
However, the same mechanism that pays holders with returns also gives the protocol’s business model a hint of risk.
“Risks arise for Ethena when cryptocurrency markets experience sharp price corrections and the funding rate becomes negative as traders liquidate their long positions and others want to open short positions,” wrote CryptoQuant to Twitter on Tuesday.
$USDe stress test:
Their reserve fund can handle prolonged negative funding rates like in 2022's FTX/LUNA scenario as long as its market cap stays below $3B (currently $2.4B).
The protocol is robust if sufficient reserve funds relative to its market cap. pic.twitter.com/dQLZOqo2o5
— Ki Young Ju (@ki_young_ju) April 17, 2024
Ethena keeps its peg to the dollar by using a delta-hedging strategy. The protocol backs USDe using Bitcoin (BTC) and Ethereum (ETH), and counterbalances fluctuations in value around those investments by holding perpetual futures shorting both assets.
By contrast, traditional stablecoin issuers typically back their tokens with reserves consisting of cash and U.S. treasuries – the latter of which generates most of the firm’s profit. Compared to this model, Ethena’s reserves are far more censorship-resistant, given that many components of the system are based on-chain.
Since the Ethereum and Bitcoin
