USDe Stability Check: Will Ethena Survive Funding Rate Challenges?

Ki Young Ju, an On-chain analyst, recently posted insights on X platform regarding the stability of Ethena’s synthetic dollar protocol, USDe. According to Ki Young Ju’s analysis, the protocol’s reserve fund appears capable of weathering challenges akin to the 2022 FTX/LUNA scenario, as long as its market cap remains below $3 billion.

$USDe stress test:

Their reserve fund can handle prolonged negative funding rates like in 2022’s FTX/LUNA scenario as long as its market cap stays below $3B (currently $2.4B).

The protocol is robust if sufficient reserve funds relative to its market cap. pic.twitter.com/dQLZOqo2o5

— Ki Young Ju (@ki_young_ju) April 17, 2024

Currently, the market cap stands at $2.4 billion, indicating that the protocol’s strength lies in maintaining an adequate reserve fund relative to its market capitalization. This highlights the protocol’s robustness, provided that the reserve funds remain proportionate to market demand.

Ethena, the platform housing the stablecoin USDe, boasts itself as a censorship-resistant, scalable, on-chain form of money. USDe maintains a 1:1 peg to the US dollar by hedging staked Ethereum (and Bitcoin) collateral, thereby mitigating exposure to collateral value fluctuations. The protocol generates yield from funding payments and staked ETH rewards, distinguishing itself from other stablecoins like USDT and USDC, which offer no native yield.

However, Ethena faces various risks in maintaining the USDe peg, including funding, liquidation, custodial, exchange failure, and collateral risks. Particularly concerning is the funding risk, which arises from persistently negative funding rates. In such scenarios, Ethena may be required to pay traders with long positions to keep its short positions open, potentially straining its reserve fund.

Nevertheless, amidst discussions of risk mitigation, USDe continues to assert its position as the fastest-growing stablecoin by market capitalization since its inception. Its unique revenue-generating mechanisms, derived from funding payments and staked ETH rewards, offer holders a distinct advantage over traditional stablecoins like USDT and USDC.

One crucial metric to monitor is the Keep Rate, determining the portion of yield directed to the reserve fund. A higher Keep Rate bolsters the fund against negative funding rates, ensuring stability during market downturns. Presently, the USDe price is quoted at $0.998618 and has maintained its peg over the last 24 hours.

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