Doubts Arise Over Ethena Labs’ Stablecoin Viability

Members of the cryptocurrency community have raised concerns regarding the 27.6% annual yield offered by Ethena Labs’ newly launched stablecoin, USDe.

The project made the stablecoin available on the Ethereum mainnet on February 19.

Announcing the @ethena_labs public mainnet ?

Details on our “Shard Campaign” in the following tweet pic.twitter.com/kXU5WjJ4rB

— Ethena Labs (@ethena_labs) February 19, 2024

According to the Ethena Labs website, the asset is described as a “synthetic dollar” for passive income in the network. At the time of writing, the total value locked in the protocol exceeded $307 million with 4,460 users.

The platform supports tokens such as USDT, FRAX, DAI, crvUSD, and mkUSD, which are converted into USDe upon deposit. USDe can then be staked in Ethereum (yielding 5%) or deposited in another DeFi protocol for additional income from futures trading (over 20%).

Rewards for locking USDe are calculated weekly based on the chosen strategy.

On February 16, Ethena Labs announced raising $14 million in funding with support from venture firm Dragonfly and other investors. In 2023, the startup also received $6 million from Binance Labs, Gemini, Bybit, Mirana Ventures, OKX Ventures, and Deribit.

DeFi Llama developer 0xngmi pointed out that the real issue with the stablecoin lies in the potential for yield inversion.

i dont get why so many people are focused on ethena’s high yield (its a basis trade) instead of the fact that there’s been 2 projects that tried this before and both gave up because they lost money due to yields inverting

— 0xngmi (@0xngmi) February 20, 2024

“When yields invert, you start losing money, and the larger the stablecoin, the more money it loses. Previous projects attempted to [close short positions when yields turned negative], but opening/closing positions has its costs, and this process consumed all the returns,” he explained.

The developer also reminded that there were two similar projects in the past that lost money due to yield inversion. One of them was Anchor Protocol in the collapsed Terra ecosystem, which he classified as a Ponzi scheme.

In response to the criticisms, Ethena’s Head of Research, Conor Ryder, stated that the protocol was launched with “settings based on historical tests that did not assume hypothetical risks.”

A lot of new eyes on Ethena today and people are right to point out the risks involved

I wanted to take a sec to highlight some of the extensive work we’ve done surrounding the risks of the design, and specifically addressing funding risk

Before I get into the meat and veg… pic.twitter.com/zfuWMljkSB

— Conor Ryder (@ConorRyder) February 19, 2024

“There is a clear demand for cryptocurrency to open leveraged long positions. Deep capital pools are unwilling to provide loans. Negative funding rates are a feature, not a bug. USDe was created with negative funding in mind,” the project representative clarified.

Anthony Sassano, founder of The Daily Gwei, emphasized that the community’s concern over Ethena’s yield is a “healthy signal” for the crypto industry.

I backed @ethena_labs with a small check because I liked the founder and thought the idea was worth pursuing.

In saying that, I’m very glad to see lots of people questioning Ethena’s design and asking how they can offer things like 20%+ yield and also exploring what all of the…

— sassal.eth/acc ?? (@sassal0x) February 20, 2024

“This is very different from the last cycle, where those asking questions were in the minority. […] I’m very glad to see many people questioning Ethena. Think and clarify how they can offer things like 20% yield, and also explore all the major risks,” he advised.

Earlier, the Layer 2 solution Blast, which also provides passive income through asset locking, launched a test network.

During its announcement, the project also faced criticism from the crypto community. At that time, Blast’s founder, known as Pacman, responded to the criticisms and explained the method of achieving high yields on the platform.