The rapid surge in market cap of Ethena Labs’ latest stablecoin has set a historical record in the realm of dollar-pegged assets within the cryptocurrency domain. However, the astounding ascent of USDe has instilled concerns that it could undergo a fate similar to the infamous crashes experienced by other stablecoins.
Despite drawing parallels due to its enticing 17.2% yield with Terraform Labs’ ill-fated stablecoin UST, USDe bears little resemblance to UST, which relied on the circular backing of its own token, an algorithm, and mere wishful thinking.
Ethena distinguishes itself from its forerunners by characterizing its stablecoin as a “synthetic dollar.”
In order to generate the USDe synthetic dollar, users deposit Bitcoin, Ether, Staked Ether (stETH) or USDT into the platform, which is then utilized to establish equivalent short perpetual positions or derivatives contracts that have no expiration date.
If the asset’s value encounters a decline, it is counterbalanced by its 1:1 futures position, thereby mitigating any losses. Conversely, if the collateral appreciates, the falling value of the short position will offset it.
This mechanism, commonly known as “delta-neutral,” has been tried and tested over decades as a variant of the cash-and-carry trade in traditional finance, according to Justin d’Anethan, the head of APAC business development at Keyrock. It is deemed secure under favorable market conditions.
However, what transpires when the situation takes a turn for the worse?
USDe minting process. (Ethena Labs)
Professionals divulge to Magazine the examinations that Ethena must endure to demonstrate its robustness amidst market turmoil.
The peril of negative funding rates
The ability of Ethena to provide elevated yields can be attributed to the hot streak observed in the crypto market.
With fewer investors being inclined to wager against the rising crypto prices, short futures investors such as Ethena can accumulate regular payments from long contracts in the form of funding rates and dispense USDe yield.
Funding rates embedded in perpetual futures align the contract prices with the spot price of the underlying asset, thus averting substantial deviations.
During bullish trends with heightened demand for…
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