Experts worry Ethena’s Bitcoin-backing strategy for USDe could bring ‘contagion risks’

CryptoQuant CEO Ki Young Ju has voiced concerns about Ethena’s recent decision to incorporate Bitcoin as a backing asset for its USDe synthetic dollar.

On April 4, Ethena Labs revealed plans to onboard BTC as a backing asset for USDe to create a safer product for its users. The firm said:

“After the unprecedented growth or USDe since launch, Ethena hedges represent ~20% of ETH open interest as of today. With $25 billion of BTC open interest readily available for Ethena to delta hedge, the capacity for USDe to scale has increased >2.5x.”

USDe is a fast-rising “stablecoin” that has attracted significant community attention due to its high annual yield of 37%. Notably, its market capitalization has crossed the $2 billion mark and it has scored adoption from major DeFi projects like MakerDAO.

Community concerns

However, Ju was concerned that Ethena’s BTC decision poses “potential contagion risks” for Bitcoin holders while drawing parallels with Terra Luna’s inclusion of the flagship digital asset as collateral for its failed algorithmic UST stablecoin.

He questioned:

“How do they maintain a delta-neutral strategy for $BTC in bear markets? In bull markets, they hold spot BTC and short BTC. If there’s a method to short BTC by holding some DeFi-wrapped BTC, the market size would be smaller than its TVL.

Consequently, Ju concluded that USDe was “a CeFi stablecoin run by a hedge fund, effective only in bull markets. Correct me if I’m wrong.”

Moreover, Fantom creator Andre Cronje shared similar apprehensions about Ethena. He questioned USDe’s safety, highlighting lingering uncertainties despite his extensive review and assessment of the asset.

Furthermore, Cronje expressed concerns about Ethena’s resilience in adverse market conditions, likening it to UST’s functioning, stating, “It works until it doesn’t.”

Ethena’s pushback

Nevertheless, defenders of Ethena within the crypto community have emerged, providing explanations for its distinctiveness from Terra Luna.

Wintermute CEO Evgeny Gaevoy explained that there was no way to be liquidated, and the only significant risks were related to custody and execution. He said:

“You are long stETH, short ETH perp (and use stETH as collateral for perp position). You cannot be liquidated. Key risks here are custody/execution related.”

Wintermute is an investor in the protocol.

Seraphim Czecker, Ethena’s head of growth, further explained the platform’s strategy as a straightforward cash-and-carry trade.

According to him, the platform uses minted assets to acquire BTC, which is then used as collateral to shorten its original value in perpetual futures trading. This approach aims to offset BTC declines by increasing perp positions accordingly.

Additionally, Ryan Watkins, the co-founder of crypto hedge fund Syncracy Capital, chimed in that those spreading FUD about Ethena probably just have severe PTSD from UST. He added:

“Of course there are risks as is the case with any new protocol, but if you’re looking for a boogeyman, you’ll probably have better luck looking elsewhere.”

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