DeFi
Ethena downplays danger of letting traders use USDe to back risky bets – DL News
- Ethena and ByBit will allow derivatives traders to use USDe as collateral.
- There is a risk in letting traders use an asset partially backed by derivatives to place more bets.
Ethena has downplayed the dangers of a new feature, which will allow traders to put up its synthetic dollar USDe as collateral when trading derivatives, which are risky bets on the prices of crypto assets.
While allowing users to underwrite their trades with yield-bearing USDe is an attractive prospect, Ethena said there is potential risk in letting traders use an asset partially backed by derivatives to place even more derivatives bets.
“We have taken this risk into account and that is why Ethena operates across more than five different sites,” said Conor Ryder, head of research at Ethena Labs. DL News.
The move comes as competition in the stablecoin sector intensifies.
In recent weeks, PayPal grown up the amount of its stablecoin PYUSD in circulation 96%, while the MakerDAO cooperative plans a rebrandingaiming to increase the supply of its DAI stablecoin to 100 billion.
US dollar growth stagnates
It comes as Ethena has lost momentum after its blockbuster launch in December.
In early July, USDe reached a record level of 3.6 billion in circulation.
That figure has now fallen by 11% to around 3.2 billion.
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New uses for USDe could boost demand for Ethena’s products.
This is where the new plan, announcement Tuesday with ByBit, one of its partner exchanges, is coming.
Ethena users create USDe by depositing Bitcoin or Ether into the protocol.
Ethena then covers these deposits with short positions – bearish bets – on the corresponding asset.
This creates a stable support for USDe, unaffected by price fluctuations in Bitcoin or Ether.
Mitigate risks
While using USDe as collateral for derivatives trading is proving popular, it is unclear what the effects will be if the cryptocurrency market experiences major fluctuations.
Using derivatives as collateral to place more bets has already had disastrous effects.
In June 2022, Lido’s liquid staking token stETH broke its peg to Ether following the fallout from the Terra collapse.
Many traders who used looping leverage to increase their stETH staking yields were liquidated, creating a cascade that caused the price of Ether to drop by more than 43%.
Ethena Labs founder Guy Young said: DL News His office and his partners have taken many precautions.
Ethena spreads bearish bets supporting the USDe across the five exchanges it partners with.
According to Ethena, 48% of short positions supporting USDe are on Binance, 23% on ByBit, 20% on OKX, 5% on Deribit, and 1% on Bitget. website.
In doing so, Ethena aims to minimize the impact of an unforeseen event on a stock market.
The same theory applies to the distribution of risks across different supporting assets.
Fifty percent of USDe is backed by Bitcoin, 30% by Ether, 11% by Ether liquid staking tokens, and 8% by Tether’s USDT stablecoin.
Previous reviews
Ethena has already been criticised regarding the risks associated with USDe.
Some have compared USDe to TerraUSD, an undercollateralized stablecoin that collapsed in 2022.
“It’s not a good design for long-term stability,” said Austin Campbell, an assistant professor at Columbia Business School. said as the USDe launch approaches.
Young replied to critics, saying the industry needs to be more diligent and careful when “marketing products to users who might not understand them as well as we do.”
Ethena has since added a disclaimer on its website stating that USDe is not the same as a fiat stablecoin like USDC or USDT.
“This means that the risks involved are inherently different,” the project says on its website.
Tim Craig is DL News DeFi correspondent based in Edinburgh. Feel free to share your tips with us at tim@dlnews.com.