Ethena, the protocol behind it USDe digital dollarAccording to the platform, it currently accounts for nearly 5% of global Ether perpetual futures open interest. data dashboard.
USDe is a token tied to the dollar value that offers high yields. Although it has been described as a stablecoin, the team avoided using the term, preferring instead the term “synthetic dollar.” George Calle, Vice President of Research at The Block, emphasized that Ethena’s USDe is essentially a tokenized representation of the cash and carry arbitrage that exists in cryptocurrency markets. In this way, you generate profit by selling Ether futures and staking Ether.
According to CoinGecko data, the project has had ad returns of up to 27%, driving users to mint approximately $420 million worth of USDe tokens to date. The project initially paid out only 15% of the first week’s return to holders, but after the backlash it quickly changed course and paid out the full 24% return generated from its assets instead of freeing up funds to run its core team.
Sustainable returns?
This growing market share has raised concerns that the protocol’s profitability may drop significantly as its market share increases. yet AthenaFounder Guy Young, who goes by the pseudonym Leptokurtic, said he was not worried about these levels but said the protocol could suffer from higher market share.
Young said that if USDe’s yield falls significantly, a self-correcting mechanism kicks in. He explained that in such a scenario, market participants would decline to stake USDe. That would bring the funding ratio back to a new equilibrium, he said.
He added that it would be even more concerning if the protocol constituted around 30-40% of Ether perpetual futures open interest. “This is when products like Ethena start to experience more severe capacity constraints,” he added.
Calle said Ethena’s design would likely put downward pressure on funding rates but would not post questions about solvency or systemic risk. Instead, the question arises as to how much capital the protocol can accommodate before yields are reduced to levels that are unattractive to token holders.
Differences between Luna and UST
One of the biggest crashes in cryptocurrency was the Luna token and its sister token UST, a stablecoin offering high yields of nearly 20%. This high level of similarity has led to many comparisons between UST and USDe.
But Calle argued that this comparison was wrong. He noted that historically the cryptocurrency market has been characterized by positive funding rates and Ethena’s strategy is to create delta-neutral positions that capture these positive funding rates, including some staking returns.
“Given that this strategy has projected annual returns of 20-40% at current funding rates, many are comparing this strategy to older algorithmic stablecoins like Terra, which advertised returns of up to 20% on UST,” Calle said. “There is a misidentification.” “However, Terra is designed in a way that relies on continued capital inflows to prevent the inevitable death spiral it experiences in May 2022, and Ethena can safely exist even if the returns or total value locked into the protocol decline.”
Calle added that the protocol’s mechanisms can actually generate positive returns even during periods of negative funding rates, as long as the negative funding costs are not greater than positive. ETH
-0.87%
Staking returns. He also noted that the protocol currently has an insurance fund set at $10 million, which it can tap into if something like this happens.
“What will be interesting is whether Ethena becomes popular enough to be relevant to this question, and whether the Ethena team will adopt other measures, such as deposit caps, to maintain expected returns at an arbitrary level,” he said.
Ethena Labs’ latest funding round
Last week, Ethena Labs announced that it had raised $14 million in a strategic funding round. the family office of Dragonfly and BitMEX founder Arthur Hayes; maelstromEthena Labs said on February 15 that it co-led the round.
The decentralized finance platform pledged more than $50 million in this round, but capped the deal at $14 million because it doesn’t currently need more cash, Young told The Block. Ethena Labs originally published an incorrect list of high-profile investors, including companies like PayPal Ventures and Fidelity, but this was later corrected.
Young added that the round began in late December and closed last week and consisted of simple contracts for future assets through token warrants. The round raises Ethena’s valuation to $300 million, he added.
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