Is the ethena stablecoin protocol a Terra-style collapse waiting to happen? Photo by Valery Fedotov on Unsplash.
Key Takeaways
- Ethena Labs’ USDe has garnered a lot of attention recently.
- However, Fantom founder Andre Cronje recently expressed concern that the stablecoin could be the next UST.
- USDe uses a complex hedging mechanism to maintain its dollar peg and offer attractive yields.
Andre Cronje recently raised his concerns about a new crypto protocol, “which is gaining a lot of traction”. However, he deemed it to be “very high-risk.”
Not wanting to point fingers, Cronje didn’t name the project in question. But the Fantom founder is clearly concerned that Ethena Labs’ USDe could be the next Terra.
Andre Cronje Compares USDe to UST
Following the collapse of Terra’s UST stablecoin in 2022, many analysts pointed out that the 20% yields on offer should have been a red flag to investors. As the saying goes, if it looks too good to be true, it probably is.
Nevertheless, when Ethena Labs launched USDe in February promising an annual percentage yield (APY) of 27.6%, it proved an instant hit.
In a recent post on X, Cronje recalled that he was confident UST would fail from the outset. And now, he has his suspicions about USDe too: He said
“Instead of naming or finger pointing, I wanted to ask those smarter than me, where I am getting it wrong, I have been through all available documentation, I have read others assessments, but I still do not see how the risk vectors are mitigated.”
How Does Ethena Work?
To issue USDe, the Ethena protocol uses staked ETH as collateral. Given Ether’s price volatility, Athena Labs uses the term “synthetic dollar” rather than stablecoin. Nevertheless, the protocol is designed to maintain an equivalence between USDe and fiat dollars.
Other crypto-collateralized stablecoins require a deposit worth more than the value of the issued tokens. However, depositors receive USDe worth 100% of their collateral value.
To mitigate against the price of ETH dropping, the platform leverages a delta hedging strategy to generate money from short positions when the cryptocurrency devalues.
In theory, the hedging strategy maintains a stable dollar peg. Meanwhile, the ETH staking rewards fund USDe yields.
Risks Associated With USDe
While Croje has voiced his concerns over Ethena’s peg mechanism, responses to his post sought to explain why USDe is different from UST.
For instance, the DeFi influencer Monetsupply noted that, because Ethena’s overall portfolio has leverage of less than 1x, the risk of liquidation is extremely low.
However, they pointed out that even though Ethena deposits are spread across 3 custodians “with a good track record,” custody remains “one of the more significant risks.”
This sentiment was echoed by Wintermute CEO Evgeny Gaevoy, who claimed that depositors can’t be liquidated unless the ETH funding rate turns negative for a prolonged period.
Former Terraform PR Man Brian Curran Tells Court Working for Do Kwon Made Him “Angry”
