Ethena (USDe) is a stablecoin that emerged in late February and has quickly become the fastest-growing stablecoin in history with a market cap of over $2.3 billion. Unlike other leading stablecoins, Ethena generates yield for its holders, making it an attractive option for investors. However, this mechanism also poses unique risks for holders, especially during periods of sharp price corrections in cryptocurrency markets.
The protocol uses a delta-hedging strategy to keep its peg to the dollar, backing USDe with Bitcoin and Ethereum and counterbalancing fluctuations in value by holding perpetual futures shorting both assets. This differs from traditional stablecoin issuers who typically back their tokens with cash and U.S. treasuries. Ethena’s reserves are more censorship-resistant since many components of the system are based on-chain.
Ethena’s revenue comes from the fact that Ethereum and Bitcoin futures markets have a bias towards long positions, resulting in payouts for shorts. However, when funding rates turn negative, these payouts become penalties that are covered by Ethena’s reserve fund. The central question is whether the reserve fund will be enough to absorb all negative funding rate payments to avoid the liquidation of short positions, especially if the token’s market cap exceeds a certain threshold.
According to CryptoQuant’s analysis, Ethena’s current reserve fund of $32.7 million is only sufficient to protect USDe holders if the token’s market cap remains under $4 billion. If the market cap rises to $10 billion, the reserve fund would need to increase to $80 million to provide similar safety. Investors are advised to monitor the adequacy of Ethena’s reserve fund relative to the market capitalization of USDe to ensure that it can handle periods of extremely large negative funding rates.
Ethena’s unique business model and revenue generation mechanism make it an attractive option for holders seeking yield on their stablecoin investments. However, the risks associated with sharp price corrections in cryptocurrency markets and negative funding rates require careful monitoring of the protocol’s reserve fund to ensure the safety of USDe holders. As Ethena continues to grow in popularity and market cap, investors must assess whether the reserve fund is sufficient to withstand potential challenges in the future.
