The Ethena (ENA) stablecoin, a synthetic dollar protocol running on Ethereum, has recently encountered remarkable growth and new challenges, prompting a closer examination of its stability and underlying risks per CryptoBusy, a top analyst. Amid its surge in market capitalization to over $2 billion since its launch in February, concerns have arisen regarding the sustainability of its peg to the US dollar and its ability to weather fluctuations in the crypto market.
One of the primary risks highlighted by CryptoQuant, an on-chain analytics firm, is the potential for negative funding rates impacting USDe, the stablecoin issued by Ethena. The stablecoin maintains its peg by employing delta hedging strategies involving short positions on centralized exchanges. However, as the market cap of USDe grows, so do the risks associated with maintaining this peg.
Currently trading at $0.850643, CryptoQuant’s analysis indicates that the current reserve fund of $32.7 million may suffice if the market cap of USDe remains below $4 billion. However, as the stablecoin’s market cap expands further, particularly to $5 or $10 billion, the reserve fund would need substantial augmentation, potentially to the range of $40 to $100 million, to navigate periods of severely negative funding rates effectively.
Additionally, the analysis emphasizes the importance of Ethena’s “keep rate,” which determines the portion of yields directed to reserves. This rate plays a critical role in bolstering reserves commensurate with the market cap of USDe, ensuring resilience against adverse market conditions, including potential bear markets.
Algorithmic stablecoins like USDe have attracted attention due to their enticing high yields, reaching up to 17%. However, this allure is juxtaposed with memories of past market collapses, notably the Terra/Luna ecosystem in 2022.
The comparison with Terraform Lab’s UST, which faced significant challenges leading to market turmoil, underscores the need for caution and diligent monitoring of such projects. Investors and stakeholders are advised to remain vigilant regarding Ethena’s reserve fund adequacy relative to USDe’s expanding market cap.
