Will Ethena’s USDe Collapse Like Terra’s UST? Metrics to Watch

Ethena’s USDe, a synthetic US dollar protocol on Ethereum, has quickly gained traction with a market cap exceeding $2 billion.

Unlike traditional stablecoins, USDe is not backed by physical US dollars or over-collateralized with cryptocurrencies. Instead, it maintains its dollar peg through a sophisticated strategy of delta hedging its crypto collateral.

Is Ethena’s USDe Doomed? 2 Key Metrics to Watch

Julio Moreno, CryptoQuant’s Head of Research, emphasized the innovative yet risky strategy underpinning USDe. By hedging spot cryptocurrency exposure with short positions in perpetual futures, USDe generates yield in “normal” market conditions. However, this approach exposes it to unique risks, particularly funding risk.

Funding risk becomes critical in extremely volatile markets where negative funding rates occur. This means USDe holders could face scenarios where Ethena needs to cover substantial payments to maintain these positions.

In an exclusive report shared with BeInCrypto, Moreno outlined two essential metrics for investors: the reserve fund’s size relative to USDe’s market cap and the keep rate — the portion of generated yield reinvested into the reserve fund.

“Funding payments become larger as USDe market capitalization increases (as short positions also become larger). To safely manage the extraordinary event of large negative funding rates at larger market capitalizations of $5, $7.5, or $10 billion, the reserve fund would need to increase to about $40, $60, and $80 million, respectively,” Moreno wrote.

To minimize risk, Moreno also suggested that USDe must maintain a keep rate above 20%, which is crucial to bolster the reserve fund adequately. He emphasized that these measures are necessary for USDe to avoid the pitfalls that led to the collapse of Terra’s UST.

Read more: What Is Ethena Protocol and its USDe Synthetic Dollar?

The ability to swiftly adapt reserve funds and keep rates in response to market dynamics will be decisive in USDe’s sustainability as a stablecoin. Still, investors must continue to monitor the reserve fund and keep rates to avoid risks.