Ethena is a synthetic dollar protocol on Ethereum that issues the stablecoin USDe. The asset aims to be a censorship-resistant and scalable form of digital money pegged to the US dollar.
On April 16, on-chain analytics firm CryptoQuant took a deep dive into the Ethena ecosystem revealing risks with the latest stablecoin, which has seen its market capitalization grow to more than $2 billion in a shorter time after launch than any other major counterpart.
USDeās market cap peaked this week at just under $2.4 billion, following a surge of 900% following its launch in February, making it the fifth-largest stablecoin.
USDe is backed by crypto assets like ETH and BTC and maintains its peg by delta hedging using short positions on centralized exchanges.
To mint USDe, users deposit BTC, ETH, staked Ether (stETH), or USDT into the protocol, which then opens equivalent short perpetual positions with no expiration date.
However, the stablecoin faces risks in maintaining USDeās peg, especially from āfunding risksā having to pay negative funding rates when traders want to open more short than long positions.
Funding rates are used to maintain the balance between the price of perpetual futures and the price of the underlying asset.
CryptoQuantās analysis shows that Ethenaās current $32.7 million reserve fund is enough to cover extremely negative funding rates if USDeās market cap stays below $4 billion (it is currently $2.35 billion).
However, funding payments become larger as USDe market capitalization increases, as short positions also become bigger, noted CryptoQuant head of research Julio Moreno.
If the stablecoin market cap grows to $5 or $10 billion, the reserve fund would need to increase to $40 to $100 million to handle periods of extremely negative funding rates safely.
After crunching the numbers, Moreno concluded:
The analysis also noted that Ethenaās ākeep rate,ā which is the portion of yield sent to reserves, is crucial to growing the reserves appropriately based on USDeās market cap to withstand bear market conditions.
Market participants have a right to be wary about algorithmic stablecoins, as most of them remember the astronomical rise and cataclysmic collapse of the Terra/Luna ecosystem in 2022.
Moreover, USDeās attraction is yields as high as 17%, which has drawn comparisons with Terraform Labās UST, the much-hyped stablecoin that went up in flames causing the crypto contagions almost two years ago.
The post Ethena USDe Tops $2.3B Market Cap But Risks Identified appeared first on CryptoPotato.
On April 16, on-chain analytics firm CryptoQuant took a deep dive into the Ethena ecosystem revealing risks with the latest stablecoin, which has seen its market capitalization grow to more than $2 billion in a shorter time after launch than any other major counterpart.
USDeās market cap peaked this week at just under $2.4 billion, following a surge of 900% following its launch in February, making it the fifth-largest stablecoin.
Ethena Risks Revealed
USDe is backed by crypto assets like ETH and BTC and maintains its peg by delta hedging using short positions on centralized exchanges.
To mint USDe, users deposit BTC, ETH, staked Ether (stETH), or USDT into the protocol, which then opens equivalent short perpetual positions with no expiration date.
However, the stablecoin faces risks in maintaining USDeās peg, especially from āfunding risksā having to pay negative funding rates when traders want to open more short than long positions.
Funding rates are used to maintain the balance between the price of perpetual futures and the price of the underlying asset.
CryptoQuantās analysis shows that Ethenaās current $32.7 million reserve fund is enough to cover extremely negative funding rates if USDeās market cap stays below $4 billion (it is currently $2.35 billion).
However, funding payments become larger as USDe market capitalization increases, as short positions also become bigger, noted CryptoQuant head of research Julio Moreno.
If the stablecoin market cap grows to $5 or $10 billion, the reserve fund would need to increase to $40 to $100 million to handle periods of extremely negative funding rates safely.
After crunching the numbers, Moreno concluded:
Algorithmic Stablecoin Concerns
The analysis also noted that Ethenaās ākeep rate,ā which is the portion of yield sent to reserves, is crucial to growing the reserves appropriately based on USDeās market cap to withstand bear market conditions.
Market participants have a right to be wary about algorithmic stablecoins, as most of them remember the astronomical rise and cataclysmic collapse of the Terra/Luna ecosystem in 2022.
Moreover, USDeās attraction is yields as high as 17%, which has drawn comparisons with Terraform Labās UST, the much-hyped stablecoin that went up in flames causing the crypto contagions almost two years ago.
The post Ethena USDe Tops $2.3B Market Cap But Risks Identified appeared first on CryptoPotato.
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