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Ethena Labs, which is based on the Ethereum blockchain, has provided a glimpse into the creation of its new Stablecoin termed USDe, which is pegged to the US dollar. This is a bit different from the well-known stablecoins Tether (USDT) and USD Coin (USDC); the USDe is not only meant for transactions but rather as an investment offering returns.
There is a shift in the role played by Ethena Labs USDe. It stakes ETH and earns staking rewards instead of holding fiat reserves. It offers a very attractive yield of 29% per year to its holders as it does not have short funding rates. This new methodology makes it a high-yield option and sets it apart from other DeFi projects.
The USDe is growing in popularity. It was previously ranked the fourth, but now with a market cap of $4.7 billion, has displaced Dai from the USD-pegged coins basket. Nevertheless, it is still some distance behind USDT and USDC, with a total market capitalization of $135 billion and $40 billion, respectively.
As reported by CoinMarketCap, Ethena Labs USDe was able to record an impressive $171.09 million trading volume in the last 24 hours due to a rise in demand for yield-driven assets.
What to Know About How Ethena Labs USDe Model
Critics have drawn comparisons between Ethena Labs USDe and Terra-Luna, the algorithmic stablecoin that collapsed in 2022 due to an unsustainable growth model. Terra’s downfall was linked to its inability to maintain its U.S. dollar peg during a bearish market, and some experts worry USDe might face similar risks.
USDe relies on a delta-neutral trading strategy to stay stable and generate yield. It balances long and short positions in Bitcoin (BTC) and Ethereum (ETH) while hedging stETH positions on centralized exchanges. However, this approach comes with challenges. If a centralized exchange fails, Ethena’s hedges could be trapped, leaving positions exposed to potential gains or losses.
This strategy tends to perform well in bullish markets when funding rates remain positive. But in bearish conditions, negative funding rates can eat into yields, raising concerns about its long-term resilience.
Fantom Foundation’s CTO Shows Concerns About the Stablecoin Sustainability
Andre Cronje, Fantom Foundation’s Chief Technology Officer, has shared some concerns about USDe’s sustainability. He pointed out that its model seems to work well when the market is bullish but might struggle in a downturn. Cronje compared it to the Terra-Luna collapse, where the system held up until it didn’t.
He also noted that as the crypto market becomes more efficient, the profit margins, or basis spreads, could shrink. If that happens, it might become harder for Ethena Labs USDe to maintain its high yields over time. This raises questions about its long-term stability in different market conditions.
High Yield Sets Ethena’s USDe as 3rd Largest Stablecoin
Ethena Labs USDe dollar has quickly become the fastest-growing USD-pegged stablecoin in the past month. Its market capitalization jumped 73%, reaching an all-time high of $4.77 billion. This growth has pushed USDe into the third spot among stablecoins, overtaking DAI, which holds a $4.7 billion market cap. However, it still trails far behind Tether’s USDT at $135 billion and Circle’s USDC at $40 billion.
USDe’s rise mirrors the momentum it saw earlier this year when it reached a $3 billion market cap just four months after its February launch. Analysts attribute this surge to a mix of bullish market sentiment and growing demand for alternative assets offering higher returns.
Unlike USDT and USDC, which are primarily used for transactions, most USDe tokens are held for rewards. This suggests users see it more as a yield-earning asset than a medium for exchange. USDe offers attractive yields through Ethereum staking, which is hedged with short ETH funding rates. According to Ethena, sUSDe holders can earn up to 29% annual percentage yield (APY).
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