As a researcher with over two decades of experience in the ever-evolving landscape of technology and finance, I have seen my fair share of revolutionary projects that either thrive or falter. The announcement by Ethena Labs about their upcoming USDe stablecoin has certainly piqued my interest.
On December 16, 2024, Ethena Labs confirmed the release date for their USDe stablecoin, a significant milestone that coincides with the token’s market capitalization reaching an unprecedented $5.73 billion, marking a new record high.
On X’s platform, Ethena Labs – a blockchain project based on Ethereum – has hinted at the potential release of their stablecoin, USDe. This digital currency is designed to maintain parity with the U.S. dollar. Unlike traditional uses like facilitating transactions (as seen with Tether or USD Coin), USDe serves primarily as a yield-earning asset.
16.12.2024
— Ethena Labs (@ethena_labs) December 12, 2024
Unlike conventional stablecoins backed by fiat currency and held in reserve, USDe generates its returns through Ethereum staking rewards, while shielding these rewards from ETH‘s short funding rate. This unique approach gives USDe holders an appealing annual percentage yield of up to 29%, making it a lucrative financial tool within the decentralized finance sector, thanks to its two-tiered yield system.
In a swift movement, users have been drawn to USDe at an accelerated pace, making it the third-largest stablecoin tied to the U.S. dollar. It has surpassed DAI’s market cap of $4.7 billion, but trails behind USD Tether (USDT) and USD Coin (USDC), which boast market caps of $135 billion and $40 billion respectively. As per CoinMarketCap, the trading volume of USDe rose by 24.27% in the last 24 hours, reaching $171.09 million, suggesting a strong appetite for yield-generating assets.
How sustainable is the USDe stablecoin model?
Critics have drawn parallels between Ethena’s USDe and Terra-Luna, whose value plummeted in 2022 due to an unstable growth strategy. The downfall of Terra was largely due to its difficulty in maintaining its peg during a bearish market, and analysts are concerned that USDe could face similar challenges.
USDe adopts a delta-neutral trading approach, where it simultaneously holds long and short positions in Bitcoin (BTC) and Ethereum (ETH) to ensure consistency and generate returns. Ethena safeguards its long stETH holdings on centralized exchanges by hedging them, but if the exchange experiences downtime, the hedge remains in place; this means that Ethena’s positions are exposed to unrealized profits and losses. In a bull market, this method tends to perform well due to positive funding rates; however, during bear markets, once the funding rate turns negative, the yield may decrease.
Occasionally, we come across fresh sights in this particular field. Quite frequently, I find myself spending a considerable chunk of time on the learning curve. I feel at ease here. However, there have been instances within this industry that piqued my interest but I wish I had explored more, and there have been moments where I wished I had delved deeper into them as well.
— Andre Cronje (@AndreCronjeTech) April 3, 2024
“So while things are going great now (because market is positive and shorting funding rates are positive [because everyone is happy being long]), eventually that turns, funding becomes negative, margin/collateral gets liquidated, and you have an unbacked asset. The counter to that is “law of large numbers”, which is pretty much the same as UST’s $1bn BTC fund etc. It works until it doesn’t“.
by Andre Cronje
Andre Cronje, serving as the Chief Technology Officer for Fantom Foundation, has pointed out that the structure of USDe may only be sustainable during bullish market phases, and its ability to withstand bear markets remains untested, similar to the crash experienced by Terra-Luna. Furthermore, as the crypto market becomes increasingly efficient, the difference between buying and selling prices, or the basis spread, could shrink, potentially diminishing USDe’s high yields in the long term.
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2024-12-13 08:28