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TERRA-FI-ING? If it seems too good to be true, it sometimes is. But hope springs eternal that the crypto project Ethena’s new USDe token might prove sustainable despite yields that typically might signify high risk. Described as a “synthetic dollar” rather than a stablecoin, USDe is backed by Ethereum liquid staking tokens such as Lido’s stETH, but paired with short ETH perpetual futures positions on derivatives exchanges. As of Monday, the annualized yield was calculated at 24%, and according to DeFiLlama, the project has already pulled in nearly $500 million of deposits. There’s an “active discourse among the crypto community as critics fear another Terra-like collapse with an algorithmic stablecoin,” analysts at Galaxy Digital wrote last week. Terra, of course, was the project behind the UST stablecoin, which offered 19% returns before its collapse in 2022 touched off a domino-like wave of defaults, bankruptcies, lawsuits and regulatory crackdowns across the crypto industry. Coinbase Institutional researchers noted that the project has a $10 million insurance fund to guard against risks, such as yields flipping negative, but they also worried about its potential to distort market signals: “Should this protocol grow substantially, it could cause a possible imbalance in favor of shorts in the perps market, thus having a disproportionate effect on funding rates.” Ethena recently announced a $14 million fundraise, but it got messy after a draft press release went around to media listing investors who hadn’t yet committed. To the project’s credit, Ethena has gone out of its way to disclose what might go wrong, including funding risk, liquidation risk, custodial risk, exchange failure risk and collateral risk. “We believe it is crucial to highlight the risks associated with USDe, the actions we have taken to mitigate these risks, as well as the future plans to further manage and ameliorate these risks,” according to Ethena.
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