USDe will not be the next UST, but the implied risks still need to be vigilant
Analyzing the multi-layered risks of USDe, it is currently facing one, but the more dangerous one is another.Author: Azuma, Odaily Planet Daily
As the cryptocurrency market plummeted rapidly yesterday, discussions about the risks of Ethena and its stablecoin USDe have once again come to the forefront.
Dune data shows that as of the time of writing, the supply of USDe has decreased from a peak of over 3.6 billion to about 3.1 billion, with a reduction of approximately 95 million in just one day yesterday. The reason for the reduction in USDe circulation is that the arbitrage space for funding rates in a downtrend is shrinking, and may even temporarily turn negative, leading investors to choose to reduce their positions for risk aversion and to adjust their arbitrage strategies.
In a market sentiment leaning towards panic, some users are also concerned that USDe may struggle to handle large-scale redemption pressures, with some even beginning to compare USDe to UST, fearing that the former might enter a death spiral similar to the latter.
In our view, while USDe certainly has its own risks, comparing it to UST is unfair; the differences in their design mechanisms mean they are two completely different systems, with entirely different response logics under pressure. Even in the most extreme environments, USDe would only face irreversible systemic trauma after several measurable extreme conditions occur (which will be elaborated on below).
Ethena: Funding Rate Arbitrage Protocol
In short, Ethena is essentially a funding rate arbitrage protocol, with USDe being a new type of stablecoin backed by equal amounts of spot long positions (currently only supporting ETH and BTC) and futures short positions.
The biggest label for USDe is "Delta Neutral." In finance, Delta is a measure of how much the price of an underlying asset affects the changes in a portfolio. Given the nature of USDe's product, since the collateral assets of this stablecoin consist of equal amounts of spot long and futures short positions, the Delta value of the spot position is "1", while the Delta value of the futures short position is "-1", resulting in a net Delta value of "0", thus achieving "Delta Neutral."
Compared to traditional stablecoin projects, USDe's most significant feature is its more imaginative yield potential.
First, it comes from the stable returns of staking spot long positions. Ethena supports staking spot ETH through liquid staking derivative protocols like Lido, earning an annualized return of 3% - 5%.
Second, it comes from the unstable returns of funding rates on futures short positions. Users familiar with contracts understand the concept of funding rates; although funding rates are unstable, for short positions, the majority of the time, funding rates are positive in the long run, which also means that overall returns will be positive.
The combination of these two sources of income allows Ethena to achieve considerable yields (the latest protocol yield published on Ethena's official website is 8.83%, with sUSDe yielding 12.61%), which can sustainably exceed the treasury-like yield products of sDAI under normal circumstances, making USDe one of the most attractive stablecoin products in the current market.
- Note: The yield data provided by Ethena's official website often has a delay of several days, and the latest data has not yet been updated.
The Essential Differences Between USDe and UST
The story of UST has been over for too long, and old players may have forgotten its design model.
In Terra's economic model, the price stability of UST was regulated through an arbitrage system and protocol mechanisms, allowing market participants to mint UST by burning an equivalent amount of LUNA, and vice versa, to burn UST to redeem an equivalent amount of LUNA.
For example, if the demand for UST exceeds supply (assuming a price of $1.01), arbitrageurs have the opportunity to burn LUNA on-chain and mint UST, profiting from the price difference in the open market; conversely, if the supply of UST exceeds demand (assuming a price of $0.98), arbitrageurs can buy 1 UST for less than $1, then burn it to mint $1 worth of LUNA for profit.
The design model of UST has two fundamental problems: first, UST itself does not have sufficient value backing and relies entirely on algorithms for maintenance; second, in extreme market conditions where both UST and LUNA decline, its built-in balancing mechanism loses its regulatory ability and can even become a double-edged sword that backfires—arbitrage programs accelerate the decline of LUNA, further intensifying panic.
This is also the essential difference between USDe and UST.
USDe is fundamentally supported by sufficient "spot + futures" positions; Ethena's founder Guy Young mentioned yesterday that USDe's collateralization ratio has always remained above 101%, whereas UST made an unfounded promise to peg to $1 without sufficient collateral.
Additionally, UST's operation relies on LUNA, whose volatile price can impact the system itself; whereas USDe's operation is not bound to ENA, and even if ENA goes to zero, it will not directly cause the system to collapse.
Given these fundamental differences, the response strategies of USDe and UST in the face of large-scale redemptions are also different. When UST faced a failure of its balancing mechanism, it could only seek external funding assistance from entities like Jump, while USDe only needs to ensure the smooth redemption of collateral assets—this involves the liquidation of futures and the sale of spot assets (including staked spots), which also carries independent risks, to be discussed in the next section.
The Four Layers of Risk for USDe
Regarding the potential risks of USDe, Austin Campbell, a professor at Columbia Business School and founding partner of Zero Knowledge Consulting, has previously published an analysis, which we believe is the best risk analysis of USDe currently available in the market.
Austin analyzed the four layers of potential risks associated with USDe.
First is the security risk at the staking level, specifically whether the safety and sustainability of the staking can be guaranteed. As mentioned earlier, Ethena will stake spot ETH to earn staking rewards, but if the staking protocol itself is attacked, it could lead to a hole in the collateral assets of the Ethena protocol.
Second is the security risk of the futures contract trading platform. Similar to staking protocols, both DEX and CEX face hacking risks, which could also lead to the loss of collateral assets.
Third is the risk of contract availability. As Ethena scales, its liquidity needs continue to rise, and sometimes there may not be enough liquidity on the trading platform to short, and in extreme cases, there may not be enough liquidity to close positions, or the platform might even pull the plug (for example, during the 312 incident, assuming one side has sold the spot while the other side cannot close the futures)…… This could cause Ethena's arbitrage mechanism to fail, leading to losses for the protocol.
Fourth is the funding rate risk, which is also the situation currently faced by USDe. Although the funding rates for short positions are mostly positive, there is also the possibility of turning negative; if the comprehensive yield after weighted staking returns is negative, it will inevitably lead to outflows from the protocol.
Since the market downturn, the funding rates for BTC and ETH have periodically turned negative, causing the Ethena protocol to face losses during these periods. As of the time of writing, the funding rates for both BTC and ETH remain negative, so the protocol's losses are ongoing.
Market Outlook
In summary, it is expected that in the coming period, funding rates may continue to remain low (including negative values) due to market panic, which also means that USDe is likely to continue facing outflows—outflows can be seen as a form of self-repair for the protocol.
However, from the design model of Ethena, the periods of negative funding rates are inherently predictable; in other words, the current situation is merely an uncommon but inevitable state in Ethena's normal operation. Based on historical patterns, periods of positive funding rates tend to last longer, which keeps Ethena's overall yield expectations still objective, but whether historical patterns will still hold at the turning point of a bear market remains uncertain.
We tend to believe that even if the downtrend continues, as long as the market does not experience overly extreme conditions, Ethena will have sufficient time to handle redemptions. The most pessimistic outcome here is that the circulation of USDe will significantly reduce, but the operation of the protocol itself will still function.
In contrast, the more dangerous scenario remains extreme market conditions—primarily due to the third risk mentioned earlier, as the first two risks are relatively low probability—namely, issues with the liquidity of contracts on the trading platform itself, which would cause Ethena's operational logic to fail, leading to irreversible damage to the protocol.
