Ethena price backed by surging USDe inflows but there are risks

on Apr 14, 2024
  • Ethena’s total value locked has grown to over $2.3 billion.
  • This surge happened as inflows in USDe continued.
  • There are risks that this could be the next Terra Luna.

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Ethena, the relatively new blockchain company, is doing well as demand for its solutions rise among crypto investors. ENA, its token, was trading at $1.1065 on Sunday morning. While this price is lower than the year-to-date high of $1.5177, it is about 277% above its lowest point this year. Its market cap has jumped to over $1.5 billion.

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Ethena’s performance is mostly because of the growing demand for its stablecoin, USDe, which has become the seventh biggest coin in the industry. USDe has over $2.3 billion in assets, a remarkable figure for an asset that was launched recently. 

Ethena TVL

Ethena’s Total Value Locked

Concerns about the USDe peg

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Still, the remarkable growth of USDe and Ethena has raised serious questions, including comparisons with Terra, which collapsed in 2022.

Ethena’s goal is understandable in that it is providing yields to its holders. In contrast, backed stablecoins like Tether and USD Coin don’t provide returns to their holders. Instead, their returns move directly to the issuers. For example, Tether made a profit of over $6.2 billion in 2023 while Circle had a revenue of $779 million in the first half of the year.

Ethena’s USDe rewards its 147k holders with an annual APY of 17.2%, which is much higher than the average returns of the riskiest corporate bonds. The ICE BofA US High Yield Index has a yield of over 7.87%. 

Memories of Terra Luna

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As a result, USDe holders can effectively beat the market if the situation continues. However, the risk is that, unlike USDT and USDC, USDe is not backed 1:1 by US dollars. Instead, it is an algorithmic stablecoin that is backed by a strategy known as cash and carry, which involves buying an asset and shorting its derivative. 

Historically, this arbitrage strategy has worked well, which explains why ETFs like JEPI and JEPQ are thriving. However, things can go wrong, as we saw during the collapse of Terra and its ecosystem. 

Like USDe, Terra had a stablecoin known as Terra UST, which provided users with over 20% returns. This strategy worked well for months, leading to a surge in assets. The situation broke in 2022 as the stablecoin depegged, causing losses worth over $40 billion.

This is not to say that the USDe will lose its peg. However, it is to point out that the investment has significant risk, especially now that cryptocurrencies are diving. Bitcoin plunged below $65,000 on Saturday while the total market cap of all coins crashed by 6% to $2.3 trillion.


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