Ethena has downplayed the dangers of a new feature, which will enable traders to put up its USDe synthetic dollar as collateral when trading derivatives, which are risky bets on crypto asset prices.
While allowing users to underwrite their trades with yield-bearing USDe is an enticing prospect, Ethena said that there is a potential risk to letting traders use an asset partially backed by derivatives to place even more derivatives bets.
“We have considered this risk and this is why Ethena operates across more than five different venues,” Conor Ryder, Ethena Labs’ head of research, told DL News.
The initiative comes as competition in the stablecoin sector is heating up.
In recent weeks, PayPal grew the amount of its PYUSD stablecoin in circulation 96%, while cooperative MakerDAO plans a rebrand, aiming to push the supply of its DAI stablecoin to 100 billion.
USDe growth stalls
It also comes as Ethena has lost steam after its roaring December launch.
At the start of July, USDe hit an all-time high of 3.6 billion in circulation.
That’s now fallen 11%, to around 3.2 billion.
New uses for USDe could boost demand for Ethena’s products.
That’s where the new plan, announced on Tuesday with ByBit, one of its partner exchanges, comes in.
Ethena’s users create USDe by depositing Bitcoin or Ether to the protocol.
Ethena then hedges these deposits with short positions — bearish bets — on the corresponding asset.
This creates a stable backing for USDe unaffected by Bitcoin or Ether price swings.
Mitigating the risks
If using USDe as collateral for derivatives trading proves popular, there’s no knowing the effects if the crypto market swings wildly.
Using derivatives as collateral to place more bets has previously had disastrous effects.
In June 2022, Lido’s liquid staking token stETH broke its peg to Ether in the fallout from the Terra collapse.
Many traders who used looped leverage to juice their stETH staking yields were liquidated, creating a cascade that drove down the price of Ether over 43%.
Ethena Labs founder Guy Young told DL News his firm and its partners have taken ample precautions.
Ethena spreads the bearish bets backing USDe across the five exchanges it is partnered with.
Forty-eight percent of the shorts backing USDe are on Binance, 23% on ByBit, 20% on OKX, 5% on Deribit and 1% on Bitget, according to Ethena’s website.
By doing so, Ethena aims to minimise the impact of something unforeseen happening on one exchange.
The same theory applies to spreading risk over different backing assets.
Fifty percent of USDe is backed by Bitcoin, 30% by Ether, 11% by Ether liquid staking tokens, and 8% by Tether’s USDT stablecoin.
Previous criticism
Ethena has previously faced criticism over the risks involved with USDe.
Some compared USDe to TerraUSD, an undercollateralised stablecoin that collapsed in 2022.
“This is not a great design for long-term stability,” Austin Campbell, an adjunct assistant professor at Columbia Business School, said in the runup to USDe’s launch.
Young responded to the critique by saying that the industry must be more diligent and more careful when “marketing products to users who might not sort of understand them as well as we do.”
Ethena has since added a disclaimer to its website saying that USDe is not the same as a fiat stablecoin like USDC or USDT.
“This means that the risks involved are inherently different,” the project stated on its site.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.