USDe Holders Should Monitor Ethena’s Reserve Fund to Avoid Risk, CryptoQuant Warns

USDt holders are advised to keep an eye on the project’s reserve fund to prevent any risks arising from the possibility of a funding rate turning negative, as suggested by data supplier CryptoQuant.

At Ethena Labs, the company managing the USDe stablecoin in the United States, investors can earn an annual return of 17.2% by staking USDe or other stablecoins on their platform over the past week’s average. This yield is generated through a “cash and carry” trading strategy, which allows investors to buy an asset while simultaneously selling it short to receive funding payments. In simpler terms, Ethena Labs pays investors a high annual return by allowing them to lend out their stablecoins on the platform, utilizing a trading technique called “cash and carry” to generate these payments.

In simpler terms, funding is a mechanism that helps ensure prices for derivatives closely match the value of the original assets they represent. During a bull market, long position holders transfer funds to short position holders, while the opposite occurs in a bear market.

If funding rates remain in the red for an extended spell, CryptoQuant issues a caution that Ethena’s short sellers will need to fork over significant funds to those who have taken long positions.

Ethena sets aside funds specifically for this use, but these reserves would need to expand substantially if the market value of USDe keeps rising.

To ensure sustainability, the report indicates that Ethena’s contribution to its reserve fund, represented by the keep rate, must exceed a specific threshold based on fluctuating funding rates.

To endure a bear market, the report stated, Ethena must maintain a strong performance level of at least 32% in order to build up a substantial reserve fund. This sufficient reserve would enable Ethena to withstand prolonged periods of unfavorable funding rates during market downturns.