Andre Cronje, the developer of Fantom, worries that the Ethena Labs’ USDe could trigger another market crash similar to Terra. Cronje is known for his dedication to the growth of the crypto ecosystem and is regarded as one of decentralized finance (DeFi)’s most influential leaders
Cronje shared a message on his worries about Ethena Labs’ risk management, emphasizing the problem with financing rates in perpetual futures contracts, without specifically naming the protocol or the synthetic dollar directly.
Cronje stated in a post on April 3rd X, “While things are going great now (because the market is positive and shorting funding rates are positive [because everyone is happy being long]), eventually that turns, funding becomes negative, margin/collateral gets liquidated, and you have an unbacked asset.”
Ethena’s USDe stablecoin raised a lot of eyebrows at the time of its launch on the public mainnet on February 19. Ethena devs surprised everyone with its 27.6% annual percentage yield (APY), which was significantly higher than the 20% yield of the failed TerraUSD (UST) on the Anchor protocol, which collapsed in May 2022 and quickly erased tens of billions of dollars worth of value.
Guy Young, the founder of Ethena Labs, said after the mainnet launch that the industry is maturing and showing a healthy dose of skepticism after emerging from the ashes of the Terra crash.
In response to a question concerning worries about funding rates becoming negative, Young stated that they shouldn’t be too concerned, emphasizing that in 2022—one of the worst years for the cryptocurrency market—funding rates only went negative for a single week, falling below -3%.
Ethena employs various measures for negative funding rates, including an emergency insurance fund and arbitrage mechanics.
Guy explained, “Think of this as an exogenous interest rate for the system where if the interest rate is too low, that’s just the market telling us that the supply of USDe is too high relative to leverage demands in the system… So when the interest rate goes low, you’ll expect that users will not be coming into the product and they’ll be redeeming out of it, and in the process of doing so we have to lift the shorts, which allows funding to fall back to zero or above.”
While Anchor protocol’s yield was simply made up, Guy highlighted that USDe’s yield is publicly verifiable and is generated via staking returns and shorting Ether perpetual futures contracts.
