Ethena Labs To Launch Synthetic USDe Stablecoin on Dec. 16

Ethena Labs has announced the launch date of its synthetic USDe stablecoin on Dec. 16, 2024, as the token’s market cap reached $5.73 billion, an all-time high.

In a post on X, Ethena Labs, built on the Ethereum blockchain, announced a possible launch for its stablecoin USDe which is pegged with the U.S. dollar. It is mainly built as a yield-generating asset rather than an intermediary for a transaction, similar to Tether (USDT) or USD Coin (USDC).

In contrast to the traditional fiat-reserve-backed stablecoins, USDe derives its yield based on the staking rewards of Ethereum and keeps that reward away from the short funding rate for ETH. By doing so, it provides the holder with an attractive annual percentage yield of up to 29%. This double-layered yield model makes USDe a high-reward financial instrument in the decentralized finance space.

Users have rapidly flocked to USDe, making it the third-largest USD-pegged stablecoin, overtaking DAI’s $4.7 billion, but is behind USDT and USDC, which have a market cap of $135 billion and $40 billion, respectively. According to CoinMarketCap, USDe’s trading volume increased by 24.27% in the past 24 hours to reach $171.09 million, indicating high demand for yield-bearing assets.

How sustainable is the USDe stablecoin model?

Ethena’s USDe has been compared to Terra-Luna, whose value also collapsed in 2022 because of its unsustainable growth model, by critics. Terra’s collapse was attributed to its struggles to maintain its peg in a bearish market, and experts fear USDe could suffer the same fate.

USDe employs a delta-neutral trading strategy, balancing BTC and ETH long and short positions to maintain stability and yield. Ethena hedges the long stETH positions on centralized exchanges. In case a CEX goes down, the hedge may sit there;  Ethena’s positions open to unrealized profits and losses. In a bull market, since the funding rate stays positive, this technique will work well; however, in bear markets, once the funding rate becomes negative, the yield can go down. 

“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, the Chief Technology Officer of Fantom Foundation, for example, has highlighted that USDe’s model may only hold in bullish market conditions, and its resilience in a bear market is unproven, drawing parallels to the collapse of Terra-Luna. Secondly, given the growing efficiency of the crypto market, the profit margins, known as the basis spread, could narrow, reducing the profitability of USDe’s high yields in the long run.