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…
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