Ethena: Using USDe for Staking is Risky Not Dangerous

Bittime - Ethena, together with ByBit, has introduced a new feature that allows derivatives traders to use USDe, their synthetic dollar, as collateral in derivatives trades. While there are risks in allowing traders to use assets partially backed by derivatives to place more bets, Ethena has underestimated these dangers and taken the necessary mitigation steps.

Advantages and Risks of Using USDe

Ethena stated that using USDe as collateral for derivatives trading is a tempting prospect. However, they also acknowledged the potential risks in letting traders use assets partially backed by derivatives to place more derivatives bets.

“We have considered these risks and this is the reason why Ethena operates in more than five different locations,” Conor Ryder, head of research at Ethena Labs, told DL News.

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Competition in the Stablecoin Sector

The move comes amid increasing competition in the stablecoin sector. In recent weeks, PayPal increased the number of PYUSD stablecoins in circulation by 96%, while the MakerDAO cooperative plans a rebranding and aims to increase the supply of DAI stablecoins to 100 billion.

USDe Growth Decline

After an impressive launch in December, USDe's growth has slowed. In early July, USDe reached an all-time high of 3.6 billion in circulation. This figure is now down 11% to around 3.2 billion. New uses for USDe could increase demand for Ethena products.

USDe Creation and Support Mechanism

Ethena users create USDe by depositing Bitcoin or Ether into the protocol. Ethena then protects these deposits with short positions — bearish bets — on the assets in question. This creates stable support for USDe that is not affected by Bitcoin or Ether price fluctuations.

Reducing Risk

If the use of USDe as collateral for derivatives trading becomes popular, the effects can be unpredictable if the crypto market is volatile. The use of derivatives as collateral to place more bets has previously had a detrimental impact. In June 2022, Lido's liquid staking token, stETH, lost its peg against Ether following Terra's collapse. Many traders who used repeated leverage to increase their stETH staking yield were liquidated, creating a chain effect that drove down the price of Ether by more than 43%.

Ethena's Efforts in Risk Mitigation

Ethena Labs founder Guy Young told DL News that the company and its partners have taken adequate precautions. Ethena spread bearish bets supporting USDe across five exchanges they partner with. According to the Ethena website, 48% of short positions backing USDe are on Binance, 23% on ByBit, 20% on OKEx, 5% on Deribit, and 1% on Bitget. In this way, Ethena aims to minimize the impact of unexpected events on a single exchange.

Diversification of Supporting Assets

The same theory is applied to spread risk across multiple underlying assets. As much as 50% of USDe is backed by Bitcoin, 30% by Ether, 11% by Ether's liquid staking token, and 8% by Tether's USDT stablecoin.

Previous Criticism of Ethena

Ethena previously faced criticism regarding the risks involved with USDe. Some compared USDe to TerraUSD, an undercollateralized stablecoin that collapsed in 2022. “It's not a good design for long-term stability,” said Austin Campbell, an adjunct assistant professor at Columbia Business School, before USDe's launch. Young responded to this criticism by saying that the industry should be more thorough and more careful when "marketing products to users who may not understand them as well as we do."

Ethena has now added a disclaimer on their website stating that USDe is not a fiat stablecoin like USDC or USDT.

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Optimism amidst Challenges

Despite facing challenges and criticism, Ethena remains optimistic about the potential use of USDe in the crypto market. With the risk mitigation steps that have been taken, Ethena hopes to continue attracting user interest in using USDe in derivatives trading, as well as strengthening its position in the increasingly competitive stablecoin market.

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