Ethena Labs to release its synthetic USDe stablecoin on Dec. 16

Ethena Labs announced the launch 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.