Ethena has emerged as a significant player in the decentralized finance (DeFi) synthetic stablecoin market with its USDe, attracting a substantial $2.7 billion in total value locked (TVL). USDe offers high yields on its synthetic dollar, reflecting market demand for stablecoins beyond traditional asset-backed options. However, its reliance on USDT-margined contracts introduces inherent risks.
Understanding Ethena’s USDe
Ethena operates as a tokenized version of the cash-and-carry trade. Each USDe unit is backed by $0.50 in spot holdings of Ether (ETH) or Bitcoin (BTC) and $0.50 in a short position within USDT-margined perpetual contracts, maintaining a $1 value regardless of asset price fluctuations.
Yield generation stems from funding rates of perpetual contracts and Ethereum staking rewards. The crypto market’s demand for long leverage typically results in higher funding rates, contributing to USDe’s yield. However, declining market demand in 2024 has lowered USDe’s annualized yield from 30% to around 4%.
The Risks of USDT Reliance
Ethena’s dependence on USDT-margined contracts presents vulnerabilities. A potential USDT depeg due to issues in traditional finance could directly impact USDe. Consider this hypothetical depegging scenario:
- Scenario: Ethena holds a $55,000 short position on BTC/USDT perpetual contracts (approx. 1 BTC).
- USDT Depeg: USDT drops from $1 to $0.80.
- BTC Price Increase: Bitcoin rises by 25% to 68,750 USDT.
Before Depeg: A 1 BTC short position ($55,000 notional) is offset by 1 BTC held in the spot market.
After Depeg:
- Unrealized loss on perpetual contract: -$11,000 (13,750 USDT).
- USDT collateral value drops: $11,000 loss (13,750 USDT x $0.80).
- Collateral shortfall: $11,000 (20%).
Impact on USDe Holders
Users who provided USDe as collateral could face a 20% reduction in holdings value, highlighting USDe’s peg to USDT. While a USDT depeg presents a risk, prolonged negative funding rates pose a greater threat, potentially eroding returns and stability.
Alternative Synthetic Stablecoin Projects
Several projects explore different strategies to balance yield and risk in the synthetic stablecoin space:
- UXD: Faced challenges due to over-reliance on Mango Markets and USDC settlement.
- DWF Labs: Plans a synthetic stablecoin supporting USDT, USDC, DAI, USDe, and major cryptocurrencies as collateral, offering varied APYs based on risk profiles.
- Elixir: Offers deUSD, a fully collateralized synthetic dollar using Lido Staked Eth (stETH) and Savings Dai (sDAI) to short ETH, capturing positive funding rates.
Aegis.im: A Doomsday-Resistant Approach
Aegis.im takes a risk-averse approach by backing its USDa stablecoin with BTC-margined contracts, minimizing reliance on centralized assets and fiat systems. USDa is minted only with existing inflows, ensuring transparency and stability.
Conclusion
Ethena’s USDe has demonstrated the demand for yield-bearing stablecoins, achieving substantial TVL. However, its USDT reliance presents risks. Transparency, risk management, and sound minting practices are critical for the long-term success of synthetic stablecoins. Projects like Ethena and Aegis illustrate diverse approaches, balancing yield and resilience to shape the future of synthetic stablecoins.