Ethena Labs announced to back its USDe synthetic dollar with Bitcoin and some crypto experts have raised red flags on the move as it may crash the crypto market. Among these experts, on-chain data platform CryptoQuant CEO said USDe backed by Bitcoin raises risks of a potential Terra LUNA-like crisis.
Ki Young Ju, founder and CEO of CryptoQuant, said Ethena onboarding Bitcoin as a backing asset to USDe isn’t good news for Bitcoin holders.
He believes backing USDe with Bitcoin risks a potential contagion similar to LUNA. Terra-LUNA maintained a peg for UST stablecoin through Bitcoin reserves at the Luna Foundation Guard (LFG), which was sold to maintain the peg. The Terra-LUNA crisis crashed the crypto market and triggered bankruptcies for multiple crypto firms such as crypto hedge fund Three Arrows Capital.
CryptoQuant CEO especially pointed out the difficulty in maintaining delta-neutral strategy for BTC in bear market. In bull market, Ethena Labs plans to hold spot BTC and short BTC as part of cash and carry trade. He added that selling BTC to stabilize USDe’s peg if their algorithm fails during bear markets is a big concern for him.
“If there’s a method to short BTC by holding some DeFi-wrapped BTC, the market size would be smaller than its TVL. This is a CeFi stablecoin run by a hedge fund, effective only in bull markets. Correct me if I’m wrong,” said Ki Young Ju.
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Ethena Labs claims the crucial Bitcoin unlock to enable USDe to scale significantly from the current $2 billion supply to $10 billion market cap. Users need to deposit stablecoins such as USDT, FRAX, DAI, crvUSD, and mkUSD to get Ethena’s USDe.
Meanwhile, it generates a yield of 37% by shorting Ethereum (ETH) futures and pocketing funding rates. Crypto experts warn USDe is a new protocol and not a stablecoin and could have a positive or negative yield based on the market conditions.
In fact, Aave plans to drop MakerDAO’s DAI as collateral after MakerDAO proposed allocating 1 billion DAI stablecoin, nearly 20% of its total supply to USDe. AAVE chan founder Marc Zeller believes there is a major contagion risk
Ethena (ENA) price fell 9% in the last 24 hours, with the price currently trading at $0.922.
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