Ethena is a synthetic dollar protocol on Ethereum that issues the stablecoin USDe. The asset aims to be a censorship-resistant and scalable form of digital money pegged to the US dollar.
On April 16, CryptoQuant, an on-chain analytics firm, examined the Ethana system in detail and identified potential risks associated with its newly launched stablecoin, which has rapidly grown to over $2 billion in market capitalization within a shorter timeframe than any other major stablecoin after its launch.
The value of USDe’s total holdings in the cryptocurrency market reached nearly $2.4 billion this week, after experiencing a massive increase of approximately 9x since its debut in February. Consequently, USDe is now ranked as the fifth-largest stablecoin by market capitalization.
Ethena Risks Revealed
USDe is supported by cryptocurrencies such as Ethereum (ETH) and Bitcoin (BTC), and it keeps its value stable through delta hedging, which involves taking short positions on these centralized exchanges.
Users can deposit Bitcoin (BTC), Ethereum (ETH), staked Ethereum (stETH), or US Dollar Tether (USDT) into the system to generate USDe. In return, the protocol establishes equal and open-ended short perpetual positions in these respective assets.
Despite the stability of USDe as a digital currency, there’s a risk that it may deviate from the US dollar’s value due to “funding risks.” This refers to the need to cover costs when traders prefer opening more bets for the currency to decrease in value than for it to increase.
Perpetual futures’ pricing is kept in check with funding rates, ensuring a fair correlation to the value of the underlying asset.
CryptoQuant prepared an analysis on Ethena’s USDe.
A relatively new digital currency called USDe has quickly amassed a market value exceeding $2 billion within a brief period post-launch, surpassing the milestone faster than any significant stablecoin before it.
– We have had some investors requesting this analysis to…
— Julio Moreno (@jjcmoreno) April 16, 2024
According to CryptoQuant’s assessment, Ethena’s existing reserve fund of $32.7 million is sufficient to cushion against extraordinarily low funding rates should the market capitalization of USDe remain under the $4 billion mark (currently hovering at $2.35 billion).
According to Julio Moreno, the head of research at CryptoQuant, the size of funding payments grows in tandem with the expansion of USDe market capitalization, as short positions likewise become more substantial.
Should the market capitalization of stablecoins reach $5-$10 billion, it is recommended that the reserve fund be expanded to approximately $40-$100 million in order to securely manage extended intervals of unfavorable funding rates.
After crunching the numbers, Moreno concluded:
To ensure proper management of risks, investors need to check if Ethena’s reserve fund is sufficiently large, considering the market cap of USDe. This will help Ethena handle extended periods of high negative funding rates.
Algorithmic Stablecoin Concerns
The analysis pointed out that Ethena’s “retention ratio,” or the percentage of earnings set aside for reserves, plays a significant role in expanding the reserves in line with USDe’s market capitalization during bear markets.
People involved in financial markets should be cautious when dealing with algorithmic stablecoins due to the stark reminder of the massive growth and devastating crash of the Terra/Luna system that occurred in 2022.
Additionally, USDe offers alluring yields of up to 17%, making it a compelling alternative that some compare to Terra’s UST, the previously buzzed-about stablecoin associated with the crypto market turmoil over two years ago.
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2024-04-18 00:58