Ethena Labs Incorporates Bitcoin into USDe Collateral, Drawing Comparisons to LUNA

Ethena Labs has integrated Bitcoin as a collateral asset for its “synthetic dollar” USDe. An expert has described this as a risk to digital gold.

Excited to announce that Ethena has onboarded BTC as a backing asset to USDe

This is a crucial unlock which will enable USDe to scale significantly from the current $2bn supply pic.twitter.com/FOZRWBrVZV

— Ethena Labs (@ethena_labs) April 4, 2024

According to the announcement, the move aims to “significantly” increase the stablecoin’s market supply from the current $2 billion. This is facilitated by access to the BTC derivatives market, which is “growing faster than Ethereum’s.”

“With $25 billion in open interest in Bitcoin futures available to Ethena for delta hedging, USDe’s scalability has increased more than 2.5 times,” the developers claim.

The project made the stablecoin available on Ethereum’s mainnet on February 19. USDe can be locked in Ethereum staking (yielding 5%) or deposited in another DeFi protocol for additional income from futures trading (over 20%).

The asset’s peg to the dollar is maintained through a delta hedging strategy in derivatives markets. Loss risks are mitigated by holding spot positions and shorts in options, with liquidation costs covered by asset income.

Is Bitcoin at Risk?

CryptoQuant CEO Ki Young Ju expressed concerns about the risks to Bitcoin posed by its inclusion in USDe’s collateral assets.

The expert drew parallels with the collapse of Terra’s token (LUNA) and its associated algorithmic stablecoin UST.

This isn’t good news for #Bitcoin holders—it sounds like a potential contagion risk, like LUNA. Correct me if I’m wrong. Is it a good news? https://t.co/LjPUUHq15f

— Ki Young Ju (@ki_young_ju) April 5, 2024

“This isn’t good news for Bitcoin holders—it sounds like a potential contagion risk, like LUNA. Correct me if I’m wrong. Is it a good news?” wrote the founder and head of CryptoQuant.

In his view, Ethena Labs’ strategy will maintain delta neutrality for BTC in a bull market but will face challenges in a bear market. In the latter case, capacity may fall short of necessary sales volume, causing disruptions.

As a result, Ju compared USDe to a “CeFi stablecoin managed by a hedge fund.”

Growing Criticism of Ethena Labs’ “Synthetic Dollar” Mechanism

Former SushiSwap advisor known as OMAKASE also highlighted historical issues with the approach used by Ethena Labs.

Delta neutral strategies are usually never delta neutral. Post dot-com boom in Singapore, it took years for banks to unwind delta neutral books that had suddenly turned illiquid.

Size begets slippage.

— OMAKASE (@OmakaseBar) April 5, 2024

“Delta neutral strategies are usually never delta neutral. Post dot-com boom in Singapore, it took years for banks to unwind delta neutral books that had suddenly turned illiquid. Size begets slippage,” the expert wrote.

Co-founder of Fantom Foundation Andre Cronje also criticized the stability mechanism of USDe, drawing parallels with LUNA.

Every so often we see something new in this space. I often find myself on the mid curve for an extensive amount of time. I am comfortable here. That being said, there have been events in this industry I wish I was more curious about, there have also been events I definitely did…

— Andre Cronje (@AndreCronjeTech) April 3, 2024

In his opinion, Ethena Labs’ strategy is successful in a rising market, thanks to positive funding for closing positions. When the trend reverses, it will cease to work, and the scale will only exacerbate the problems.

As reported, these are not the first industry participants to question the viability of USDe.