Ethena Labs’ new stablecoin topped $2 billion in market cap faster than any other dollar-pegged asset in crypto’s history. But USDe’s meteoric rise has sparked fears that it might repeat the high-profile collapses of other stablecoins.
While its attractive yield of 17.2% has drawn frequent comparisons to Terraform Labs’ disastrous stablecoin UST, it’s really nothing like UST, which had the circular backing of its own token, an algorithm, and a few hopes and prayers.
Ethena distances itself from such predecessors by marketing its stablecoin as a “synthetic dollar.”
To mint the USDe synthetic dollar, users deposit Bitcoin, Ether, Staked Ether (stETH) or USDT into the protocol, which is used to open equivalent short perpetual positions or derivatives contracts with no expiration date.
If the price of the asset goes down, it’s balanced out by its 1:1 futures position, mitigating losses. If the collateral appreciates, it is counteracted by the falling value of the short position.
This design, often referred to as “delta-neutral,” has been battle-tested for decades as a variation of the cash-and-carry trade in traditional finance, according to Justin d’Anethan, head of APAC business development at Keyrock. It is considered safe under favorable market conditions.
But what happens when the pendulum swings the other way?
USDe minting process. (Ethena Labs)
Experts share with Magazine the tests Ethena must pass to prove its resilience under market stress.
Negative funding rates risk
Ethena has been able to offer high yields thanks to the crypto market’s hot streak.
Fewer investors are willing to bet against rising crypto prices, allowing short futures investors like Ethena to collect regular checks from long contracts in the form of funding rates and pay out USDe yield.
Funding rates in perpetual futures align contract prices with the underlying asset’s spot price, avoiding significant deviations.
In bull markets, high demand for…
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