Ethena’s USDe shows an arbitrage opportunity because of a disparity between the staked price and the free token’s trading price. USDe aims to supply Ethena’s DeFi with a more intuitive way of trading and locking in gains.
The arbitrage between USDe and staked USDe is not causing problems for now, but it has been watched closely. USDe was one of the most actively growing stablecoins in the past few weeks. Ethena was also aggressive in its early token issuance, achieving 2B in supply faster than any stablecoin protocol.
Staked $USDe (sUSDe) is currently trading at a discount of more than 1% vs. its holdings.
Meanwhile, USDe is still trading around the $1 par.
There seems to be no FUD or commotion on CT about @ethena_labs at the moment, so let’s look at some data!
🧵1/5 pic.twitter.com/HgCYSVyPc7
— dTRINITY (▲) (@dTRINITY_DeFi) June 22, 2024
The main point of Ethena is to source the best yields, mainly through ETH staking, then pay out to its holders. Any shifts in USDe may be worrying. USDe is a fully algorithmic stablecoin, not backed by crypto or other assets.
The supply of USDe has been growing, but the expansion may signal a imbalance in the Ethena protocol and other liquidity hubs.
$USDe’s mcap and the amount of interest to be paid on it is getting bigger and bigger
all of that while Ethena’s basis-trade income is non-existant anymore pic.twitter.com/DCrxQqBpyn
— Luisto (@LuistoXBT) June 24, 2024
At least in the short term, the current disparity in staked USDe is mostly causing buying. The arbitrage opportunity has drawn in traders in the past day. Traders still need to wait a week to withdraw staked USDe. In case of a bank run, Ethena’s smart contracts gradually increase the cooldown period to a maximum of 90 days. This means USDe stakers will have to wait out any market turbulence.
USDe has limited liquidity for swapping out of staking
There is also limited liquidity available to swap between the two types of USDe, as protocols are becoming depleted. At the same time, a total of $3.65B USDe were created, spreading across multiple other DeFi protocols. Even in the best-case scenario, USDe will create big queues and deplete bridges. Additionally, USDe is becoming more popular and is itself used as a form of collateral.
@ethena_labs $USDe can now be used as collateral for trading perpetual futures on @bitgetglobal derivatives exchange. https://t.co/jaBu68TqXY
8/18
— Pink Brains (@PinkBrains_io) June 24, 2024
USDe is also one of the few stablecoins that rely entirely on decentralized pairs. Most trading happens on Uniswap V3 on Ethereum against Tether (USDT). The algorithmic stablecoin also has around 8% of its volumes on Curve against another stablecoin, FRAX. The main exit ramp from Ethena’s ecosystem is other stablecoins, which are considered more secure and reliable.
USDe is not generated through ENA tokens but relies on hedging Ethereum-based market fluctuations. The goal is to avoid a death spiral in which ENA and the stablecoin it supports lose all value.
Ethena earns from funding fees on Ethereum perpetual exchanges by taking up short positions. The long bias of most traders means Ethena takes up a relatively slight risk.
Ethena’s model breaks down under bearish market conditions
A shift to bearish moods for Ethereum would break down Ethena’s basis trade and reduce the backing of the protocol. The recent de-pegging of staked USDe is causing some fears, as it coincides with an ETH market correction down to $3,300.
Ethena may face the challenge of covering months of negative funding rates for its short positions, which would make all investors abandon the protocol. During this catastrophic event, the long cooldown period for USDe may leave investors stranded.
The second issue with Ethena is that its users are holding unstaked USDe to incentivize a future airdrop. The second Ethena airdrop is only in the realm of rumors and is buying time for the protocol. The unstaked USDe serves as another layer of security for the protocol.
On-chain research also shows that only a limited cluster of addresses can cash out without a glitch, leaving many investors to take losses.
During a bull market, Ethena has tailwinds. The current de-pegging of USDe still underlines the potential market strains in case of a liquidation cascade.
Cryptopolitan reporting by Hristina Vasileva
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