Disclaimer: Information found on CryptoreNews is those of writers quoted. It does not represent the opinions of CryptoreNews on whether to sell, buy or hold any investments. You are advised to conduct your own research before making any investment decisions. Use provided information at your own risk.
CryptoreNews covers fintech, blockchain and Bitcoin bringing you the latest crypto news and analyses on the future of money.
The emerging stablecoin Ethena (USDe) presents distinct risks for its holders when compared to other dollar-pegged tokens, according to a recent report by CryptoQuant.
The Distinct Risks Of Ethena (USDe)
With a market capitalization exceeding $2.3 billion today, Ethena was introduced in late February and rapidly became the fastest-growing stablecoin on record. One of its key attractions is its ability to generate yield for holders, in contrast to leading stablecoins whose issuers retain all profits.
Nonetheless, the mechanism that provides returns to holders also introduces a degree of risk to the protocol’s business model.
“Risks for Ethena emerge when cryptocurrency markets undergo significant price corrections and the funding rate turns negative as traders liquidate their long positions while others seek to initiate short positions,” CryptoQuant stated on Twitter on Tuesday.
$USDe stress test:
The reserve fund can withstand extended negative funding rates similar to the FTX/LUNA situation in 2022, provided its market cap remains below $3B (currently at $2.4B).
The protocol is resilient if there are adequate reserve funds in relation to its market cap. pic.twitter.com/dQLZOqo2o5
— Ki Young Ju (@ki_young_ju) April 17, 2024
Ethena maintains its dollar peg through a delta-hedging strategy. The protocol supports USDe with Bitcoin (BTC) and Ethereum (ETH), and mitigates value fluctuations around these investments by holding perpetual futures that short both assets.
Related Posts
In contrast, conventional stablecoin issuers generally back their tokens with reserves of cash and U.S. treasuries, the latter of which generates the majority of the firm’s profits. Ethena’s reserves, by comparison, are significantly more resistant to censorship, as many elements of the system operate on-chain.
Ethena’s Breaking Point
Given that the Ethereum and Bitcoin futures markets historically favor long positions, shorts receive payouts consistently, providing Ethena with some inherent revenue. These payouts become penalties when funding rates turn negative, which are fully covered by Ethena’s reserve fund.
“The key question is whether Ethena’s reserve fund will be adequate to absorb all negative funding rate payments, thereby preventing the liquidation of their short positions,” CryptoQuant noted.
According to CryptoQuant’s assessment, Ethena’s current reserve fund of $32.7 million is only adequate to safeguard USDe holders if the token’s market cap remains below $4 billion. This is based on a plausible scenario of extremely negative Ethereum funding rates, similar to the period one month before and after the September 2022 Merge upgrade.
If USDe’s market cap were to increase to $10 billion, Ethena’s reserve fund would need to grow to $80 million to ensure comparable safety.
“Investors should keep an eye on whether Ethena’s reserve fund is suitable for the market capitalization of USDe to manage periods of significantly large negative funding rates,” CryptoQuant concluded.
The post Could Stablecoin Ethena (USDe) Collapse Like Terra LUNA? CryptoQuant Investigates appeared first on Cryptonews.
