Andre Cronje, co-founder, and architect at the Fantom Foundation, has raised concerns about a potential risk to the Ethena (USDe), sparking a debate about how it compares to UST (TerraUSD).
USDe is a synthetic ERC-20 (digital) dollar created by Ethena Labs to provide a reliable, scalable, and censorship-resistant digital asset. It is fully collateralized by ETH.
USDe is not classified as a stablecoin but rather as a synthetic dollar, aiming to offer a more accessible financial system. To maintain stability, Ethena employs a delta hedging strategy, ensuring the peg to the USD remains intact.
The protocol also issues the Internet Bond, a high-yield-generating financial instrument that democratizes investment opportunities.
USDe is designed to tackle the stablecoin trilemma by focusing on decentralization, capital efficiency, and stability. It achieves this by using delta-neutral strategies, ensuring censorship resistance, and scaling with capital efficiency.
On the other hand, TerraUSD (UST) is an algorithmic stablecoin developed by Terra in September 2020, designed to be decentralized and pegged to the US Dollar.
It operates on the Terra blockchain, utilizing a scalable monetary policy and offering passive income opportunities through the Anchor lending protocol.
The minting policy of TerraUSD allowed DeFi protocols to integrate it seamlessly without compromising scalability. Additionally, UST was easily integrated into crypto wallets as a payment method, enhancing its accessibility.
TerraUSD demonstrated its utility in various applications, such as being used as a pricing benchmark for DApps that create fungible synthetic assets and track real-world asset prices.
However, it collapsed in May 2022 due to a significant drop in the value of the underlying assets that were supposed to maintain its stability.
Concerns on USDe
In his article published on X, Cronje explains what he perceives as significant vulnerabilities in USDe design.
His argument stands on the dynamics of perpetual contracts and margin trading, both of which are integral components of Ethena’s framework.
Speaking about the mechanics behind perpetual contracts, which rely on funding rates and margin collateral to maintain positions, Cronje warns of the potential pitfalls when funding rates turn negative, leading to liquidation events and the emergence of unbacked assets.
Moreover, Cronje drew parallels between Ethena’s model and previous instances in the cryptocurrency space where seemingly robust systems faltered unexpectedly.
Drawing from his own experiences with projects like TerraUST and FTX, Cronje acknowledges the challenge of accurately assessing risk in the industry.
Andre Cronje, not typically a trader but delving into DeFi (decentralized finance) projects, acknowledged that trading isn’t his forte. He emphasized the importance of closing trades eventually, whether voluntarily or through liquidation.
Cronje highlighted that trading strategies often assume positions will be closed as market dynamics shift. However, he pointed out the complexity of executing the seemingly simple adage of “buy low, sell high.”
He cautioned that while current market conditions may be favorable, there’s a risk of negative funding rates in the future, potentially resulting in the liquidation of margin collateral and leaving traders with assets unsupported by USDe.
He went on to mention the “law of large numbers” as a potential counterargument, suggesting that it might mitigate the risks associated with trading.
In his plea for clarity, Cronje refrains from outright condemnation, instead inviting the expertise of the wider crypto community to provide insights and perspectives.
He acknowledges his limitations as a developer, recognizing the value of diverse viewpoints in evaluating complex systems.
In response to these concerns, the founder of Ethena has assured stakeholders that a comprehensive response is underway, promising to address the perceived risks in a longer-form format.
