Experts worry Ethena’s Bitcoin-backing strategy for USDe could bring ‘contagion risks’

CryptoQuant CEO Ki Younger Ju has voiced issues about Ethena’s latest resolution to include Bitcoin as a backing asset for its USDe artificial greenback.

On April 4, Ethena Labs revealed plans to onboard BTC as a backing asset for USDe to create a safer product for its customers. The agency stated:

“After the unprecedented growth or USDe since launch, Ethena hedges represent ~20% of ETH open interest as of today. With $25 billion of BTC open interest readily available for Ethena to delta hedge, the capacity for USDe to scale has increased >2.5x.”

USDe is a fast-rising “stablecoin” that has attracted important neighborhood consideration resulting from its excessive annual yield of 37%. Notably, its market capitalization has crossed the $2 billion mark and it has scored adoption from main DeFi initiatives like MakerDAO.

Group issues

Nevertheless, Ju was concerned that Ethena’s BTC resolution poses “potential contagion risks” for Bitcoin holders whereas drawing parallels with Terra Luna’s inclusion of the flagship digital asset as collateral for its failed algorithmic UST stablecoin.

He questioned:

“How do they maintain a delta-neutral strategy for $BTC in bear markets? In bull markets, they hold spot BTC and short BTC. If there’s a method to short BTC by holding some DeFi-wrapped BTC, the market size would be smaller than its TVL.

Consequently, Ju concluded that USDe was “a CeFi stablecoin run by a hedge fund, effective only in bull markets. Correct me if I’m wrong.”

Furthermore, Fantom creator Andre Cronje shared comparable apprehensions about Ethena. He questioned USDe’s security, highlighting lingering uncertainties regardless of his intensive evaluation and evaluation of the asset.

Moreover, Cronje expressed issues about Ethena’s resilience in opposed market situations, likening it to UST’s functioning, stating, “It works until it doesn’t.”

Ethena’s pushback

Nonetheless, defenders of Ethena inside the crypto neighborhood have emerged, offering explanations for its distinctiveness from Terra Luna.

Wintermute CEO Evgeny Gaevoy defined that there was no option to be liquidated, and the one important dangers had been associated to custody and execution. He stated:

“You are long stETH, short ETH perp (and use stETH as collateral for perp position). You cannot be liquidated. Key risks here are custody/execution related.”

Wintermute is an investor within the protocol.

Seraphim Czecker, Ethena’s head of progress, additional explained the platform’s strategy as an easy cash-and-carry commerce.

In accordance with him, the platform makes use of minted belongings to accumulate BTC, which is then used as collateral to shorten its authentic worth in perpetual futures buying and selling. This method goals to offset BTC declines by rising perp positions accordingly.

Moreover, Ryan Watkins, the co-founder of crypto hedge fund Syncracy Capital, chimed in that these spreading FUD about Ethena most likely simply have extreme PTSD from UST. He added:

“Of course there are risks as is the case with any new protocol, but if you’re looking for a boogeyman, you’ll probably have better luck looking elsewhere.”

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