Ethena’s ‘risky’ USDe has ‘an edge over Tether, Circle,’ but… – Arthur Hayes

  • USDe is better than Tether or Circle because they share yield with users, says Hayes
  • However, USDe has risks worth understanding before jumping into it  

Recently, the synthetic dollar created by Ethena, called USDe, has experienced significant growth due to its alluring yield benefits. It now ranks among the top five stablecoins with a market capitalization of over $2.3 billion, as indicated by Coingecko data. This signifies a remarkable 106% increase in value during the past month.

Guy Young, the founder of Ethena, stated that USDe has experienced rapid growth and currently holds the title of the swiftest expanding stablecoin since reaching a market capitalization of over $2 billion within only 198 days.

“USDe is the fastest growing USD-denominated asset in the history of crypto.”

USDe vs. Tether, Circle: All about interest income

Arthur Hayes, the ex-CEO of BitMEX and current CIO at Maelstrom’s crypto fund, attributed USDe’s expansion to its high return on investment, setting it apart from Tether’s USDT and Circle’s USDC.

Hayes, who’s also an investor in Ethena, emphasized, 

“I know Tether and Circle are making billions a year in interest income off of me, and I ain’t got nothing for that. There’s no Tether or Circle’s governance token. So, I think I should be compensated for my capital as well. That’s what Ethena (USDe) does.” 

To provide some context, Tether and Circle tokens primarily derive value from U.S. government securities they’re collateralized with. As a result, they generate income through the accumulation of interest on these maturing securities.

Hayes is bothered by the fact that the income generated from investing in U.S treasuries as a group, which includes the interest gained, isn’t distributed to token holders.

Traders and investors have found USDe’s distinctive proposition enticing. Nevertheless, it’s important to note that USDe involves risks and has earned comparisons to Terra Luna in the past.

USDe risks

For those who are new to this, USDe obtains its returns by holding short positions in established cryptocurrency exchanges.

Despite the product’s well-designed features, it still faces inherent dangers such as unfavorable funding rates and cryptocurrency exchanges collapsing, as demonstrated with FTX. To minimize these risks, Ethena has implemented a strategic solution: an insurance fund.

Recently, Julio Moreno, the Head of Research at CryptoQuant, shared his insights on these risks and proposed some potential solutions in an in-depth examination.

The report read,

Ethena Labs revealed potential hazards associated with USDe, their synthetic dollar, which include: the risk of insufficient funds, the danger of forced liquidations, custody risks, the possibility of exchange malfunctions, and the threat of inadequate collateral.

Regarding financing risks and determining an adequate size for an insurance fund to minimize potential harm, the analyst made the following observation:

In simpler terms, the present reserve fund of $32.7 million can meet our funding needs under these conditions if the total value of USDe in circulation does not surpass $4 billion. At present, the USDe market cap stands at $2.4 billion.

However, USDe could grow beyond $4 billion. In such a case, Moreno suggested, 

In simpler terms, managing large market cap companies with significant negative funding rates requires a substantial reserve fund. For instance, a company with a market capitalization of $5 billion would necessitate a reserve fund of approximately $40 million for safety. Similarly, companies with market caps of $7.5 and $10 billion would require reserves of around $60 million and $80 million, respectively.

In summary, the research analyst placed great importance on the key rate, or the percentage of US dollar yields retained in the insurance fund, as the most significant figure to monitor closely.

Based on the keep rate, he added, 

Based on USDe’s real market value, the required minimum fee may vary. For instance, if USDe has a market capitalization of $5 billion, then a retention rate exceeding 20% might suffice.

To summarize, USDe could potentially expand and challenge Tether or Circle in the market, but it’s essential to be aware of its underlying risks before seeking its returns.

Read More

2024-04-19 12:07