Ethena Labs, a decentralized protocol focused on the yield-generating USDe stablecoin, has become a point of contention among crypto investors, drawing parallels with the Terra ecosystem, which faced a tumultuous collapse in 2021.
Ethena Labs Creates Controversy with High Return Strategy and Compared to Terra
Ethena's token has sparked mixed reactions within the crypto community since its public launch in February. Stakeholders who stake USD for at least seven days are currently enjoying an annual return of approximately 37%.
This high return enabled the total value locked (TVL) on the protocol to rise from $178 million to $2.3 billion in just 60 days.
However, such high returns often come with inherent risks, reminiscent of Terra's UST, which paid out around 20% to stakers before its collapse.
Unlike asset-backed stablecoins such as Tether (USDT) and USDC, which derive their value from reserves such as the dollar or US government debt, USDe operates as a synthetic stablecoin.
The USDe's $1 value is maintained through a financial strategy known as cash and carry trading, which involves simultaneously purchasing an asset and shorting its derivative to capture the funding rate.
Although this trade is considered relatively safe in traditional finance, it is not without risks, especially regarding market volatility and currency issues.
Folkvang CEO Mike van Rossum expressed cautious optimism about the strategy, while highlighting potential pitfalls including issues with currency management and trading in volatile markets.
Ethena users mint USDe tokens by depositing stablecoins such as USDT, dai (DAI) and USDC, and can then stake them to earn returns.
To achieve these returns, the protocol uses various strategies revolving around cash and carry trading and takes advantage of positive funding rates on perpetual coins such as Bitcoin (BTC) and Ethereum (ETH).
Despite concerns, crypto whales have shown their confidence, with recent data showing a significant amount of money being deposited into Ethena's governance token (ENA), which remains locked for seven days or more.
But analysts like Arca's Jeff Dorman warn about the risks of relying on market forces to generate returns.
*This is not investment advice.