Ethena Labs has revealed that its synthetic USDe stablecoin will be launched on Dec. 16, 2024, coinciding with an all-time high market cap of $5.73 billion for the token.

In a post on X, Ethena Labs, which operates on the Ethereum blockchain, announced a potential launch for its stablecoin USDe, which is pegged to the U.S. dollar. USDe is designed primarily as a yield-generating asset, much like Tether (USDT) or USD Coin (USDC), rather than a transactional intermediary.

Unlike traditional fiat-reserve-backed stablecoins, USDe’s yield stems from the staking rewards of Ethereum (ETH) and protects those rewards from the short funding rate for ETH. This strategy allows for an attractive annual percentage yield of up to 29%, making USDe a high-reward financial instrument in the DeFi landscape.

As a result, users have quickly gravitated towards USDe, which has become the third-largest USD-pegged stablecoin with a market cap of $4.7 billion, surpassing DAI, although it still trails USDT and USDC, which hold market caps of $135 billion and $40 billion, respectively. According to CoinMarketCap, USDe’s trading volume surged by 24.27% in the last 24 hours, reaching $171.09 million, suggesting a strong appetite for yield-bearing assets.

How sustainable is the USDe stablecoin model?

Critics, including some analysts, have compared Ethena’s USDe to Terra-Luna, which faced a collapse in 2022 due to its unsustainable growth model. The implosion of Terra was linked to its inability to maintain a U.S. dollar peg amidst a bearish market, raising concerns that USDe might encounter similar challenges.

USDe utilizes a delta-neutral trading strategy, balancing long and short positions in Bitcoin (BTC) and ETH to stabilize yield. Ethena hedges its long stETH positions on centralized exchanges, though these positions may remain unrealized in the event of a CEX failure. While this approach is effective in a bullish market due to positive funding rates, the yield may decline if funding rates turn negative during bearish conditions.

“So while things are going great now because the market is positive and shorting funding rates are positive, eventually that turns, funding becomes negative, margin/collateral gets liquidated, and you have an unbacked asset. The counter to that is the “law of large numbers”, which is essentially the same as UST’s $1bn BTC fund, etc. It works until it doesn’t.”

by Andre Cronje

Andre Cronje, the Chief Technology Officer of Fantom Foundation, has pointed out that usDe’s viability may only persist in bullish market scenarios, with its capacity to withstand bear markets remaining untested, drawing comparisons to the downfall of Terra-Luna. Additionally, as the efficiency of the crypto market improves, the profit margins, known as the basis spread, might narrow, potentially diminishing the long-term profitability of USDe’s high yields.