Ethena captures 5% of open interest in ether perpetual futures; founder downplays concerns

Ethena, the protocol behind USDe digital dollarnow accounts for nearly 5% of global open interest in ether perpetual futures, according to the platform’s report. data dashboard.

USDe is a token pegged to the value of a dollar that offers a high yield. Although it has been described as a stablecoin, the team avoids using the term – instead preferring the term “synthetic dollar”. George Calle, VP of Research at The Block, pointed out that Ethena’s USDe is essentially a symbolic representation of the cash and carry arbitrage present in crypto markets. As such, it generates yield by selling ether futures and staking ether.

The project’s reported returns of up to 27% have so far prompted users to create around $420 million worth of USDe tokens, according to CoinGecko data. Although the project initially paid out holders only 15% of its first week’s yield, it heading quickly reversed following a backlash, paying out the entire 24% return generated by its assets instead of setting aside funds for the team’s core operations.

Sustainable performance?

This growing market share has led to fears that as it increases, the protocol’s yield could drop significantly. Again EthenaFounder Guy Young, known as Leptokurtic, said he was not concerned about these levels, but that the protocol might struggle to achieve higher market share.

Young said a self-correcting mechanism comes into play if the USDe yield falls significantly. He explained that such a scenario would see market participants abandon betting on their USDe. If they do so, he said, it would allow the funding rate to return to a new equilibrium.

He added that a more concerning situation would be if the protocol accounted for around 30-40% of the open interest in ether perpetual futures. “That’s when a product like Ethena starts to run into more serious capacity constraints,” he added.

Calle noted that Ethena’s design would likely put downward pressure on funding rates, but said this did not raise questions about solvency or systemic risk. Instead, it raises the question of how much capital the protocol can absorb before yields drop to levels unattractive to token holders.

Differences with Luna and UST

One of the biggest collapses in crypto was the Luna token and its sister token UST, which was a stablecoin offering high yields of almost 20%. Because of this high-level similarity, many comparisons have been made between UST and USDe.

Still, Calle argued that comparison was misplaced. He noted that historically, crypto markets have exhibited positive funding rates and that Ethena’s strategy is to create a delta neutral position that captures this positive funding rate – with a touch of staking yield .

“Given this strategy’s projected 20-40% annual return at current funding rates, many have falsely equated the strategy with previous algorithmic stablecoins like Terra that infamously advertised a ~20% return on UST,” Calle said. “However, Terra was designed to depend on perpetual inflows of capital to avoid the inevitable death spiral experienced in May 2022, while Ethena can exist safely even if the yield or total value locked in the protocol is reduced.”

Calle added that the protocol mechanism can actually generate a positive return even during periods of negative funding rates, provided that the negative funding cost does not exceed the positive cost. ETH

+3.09%
staking yield. He noted that the protocol also has an insurance fund, currently set at $10 million, that can be drawn on should this happen.

“What will be interesting to see is whether Ethena achieves such popularity that this issue becomes relevant, and whether the Ethena team would employ other measures, such as deposit capping, to preserve an arbitrary level of expected return,” he said.

Ethena Labs’ recent funding round

Last week, Ethena Labs announced that it had raised $14 million in a strategic funding round. The family office of Dragonfly and BitMEX founder Arthur Hayes Maelstromco-led the round, Ethena Labs said on February 15.

The decentralized finance platform had commitments of more than $50 million for the round, but capped it at $14 million because it didn’t need more liquidity at the moment, Young told The Block. Ethena Labs initially announced an incorrect list of high-profile investors, including companies like PayPal Ventures and Fidelity, which was later corrected.

The round began in late December and closed last week, Young said, adding that it was structured as a simple deal for future shares with token warrants. The round took Ethena’s valuation to $300 million, he added.

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