Ethena faces challenges as negative funding rates slash yields, contributing to a $500 million drop in the supply of USDe amid broader market turmoil.
Ethena’s USDe sees its supply shrink by $500M as negative funding rates severely impact yields.
Posted August 16, 2024 at 4:32 pm EST.
Ethena, the protocol behind the USDe “synthetic dollar,” is encountering significant headwinds as negative funding rates have reduced the returns that once fueled USDEe’s rapid growth.
Since July 1, USDe supply has shrunk by over $500 million and now stands at $3.09 billion as of the time of writing. For comparison, over the same time period, the total stablecoin market cap has grown from $161 billion to $167.4 billion.
Earlier this year, USDe attracted significant attention by offering yields between 20% and 30%, spiking to as high as 120% at one point. This led to an unprecedented rate of growth, concluding in a peak supply of $3.61 billion in early July. However, the situation has changed dramatically since then.
Read more: Ethena’s USDe Matches Solana’s Stablecoin Market Cap, Surpassing $3 Billion
Funding rates, which are periodic payments made between traders based on the difference between the spot price of an asset (like bitcoin) and its price in the futures market, have turned sharply negative. On major exchanges such as Binance, these rates have reached the lowest levels of the year at -15% annually for Bitcoin, as per Galaxy’s Kelly Greer.
For USDe, this is relevant because the Ethena protocol relies on short positions in bitcoin and other assets, such as ETH and SOL, to hedge against price fluctuations. Negative funding rates mean Ethena must pay rather than receive these periodic payments, severely impacting its yield. This downturn has significantly reduced Ethena’s ability to offer competitive yields, stalling both growth and adoption.
The annual percentage yield (APY) that once attracted many to stake USDe has now plummeted to 4% and was even 0% in recent days, according to Ethena’s dashboard.
Learn more: What Is Ethena’s USDe Synethic Dollar? A Beginner’s Guide
Adding Solana as a backing asset last week was intended to diversify and strengthen USDe’s appeal, but it has done little to counteract the negative trend. Meanwhile, Ethena’s governance token, ENA, has suffered a steep decline of 80% from its all-time high reached in April, reflecting broader concerns about the protocol’s future.
Is USDe at Risk?
Despite these challenges, analysts argue that the concerns may be overblown. An X thread by a user named “The Giver,” who has experience modeling the LUNA/UST unwind, suggests that while negative funding is a significant issue, it does not necessarily signal an existential threat to USDe. According to this analysis, the protocol has substantial reserves, including a $45 million reserve fund and an estimated $10-20 million insurance fund, which could sustain operations even during extended periods of negative funding.
The underlying mechanism of USDe—in which $1 of collateral backs $1 of the synthetic dollar, with delta-hedging strategies in place—suggests that the protocol might be able to manage the risk without triggering a downward spiral similar to what was seen with UST, The Giver explained.
Moreover, on a more positive note, USDe has successfully maintained its peg during the recent market turbulence, suggesting that the system’s underlying mechanisms are still functioning effectively.
The focus now will be on how Ethena navigates the next few weeks, particularly as it approaches the end of its second points campaign that will culminate in an airdrop, and whether it can regain user trust and stabilize its operations.
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