Three Arrows Capital's Zhu Su Raises Red Flags over Ethena's Risky Basis Trade

In the aftermath of Three Arrows Capital's collapse, co-founder Zhu Su shares his insights on risk management with Ethena, suggesting leveraging the long side of ETH trading and utilizing DeFi protocols to boost ETH demand.

Ethena's Risky Basis Trade: Warnings from Three Arrows Capital's Zhu Su

London, April 19, 2024 - Three Arrows Capital (3AC) co-founder Zhu Su, whose hedge fund spectacularly collapsed in 2022, has offered unsolicited advice to Ethena, a decentralized finance (DeFi) protocol that offers high yields on stablecoins.

3AC's collapse was precipitated by its aggressive pursuit of a "supercycle" thesis and its subsequent refusal to cooperate with creditors and liquidators. This led to Su's imprisonment in Singapore in September 2023 for attempting to flee the country.

Despite his past transgressions, Su has audaciously suggested that Ethena leverage up its long ETH positions to maintain a high "funding rate" for its USDe stablecoin.

Ethena's Basis Trade and Funding Rate

Ethena's model involves accepting deposits in various stablecoins and using these funds to purchase staked ETH. This long position is hedged by shorting ETH on exchanges, which generates a "funding rate" based on market sentiment.

By leveraging up the long side of this trade, Su believes Ethena can boost demand for leverage and keep USDe's yields elevated.

Risks and Concerns

However, industry experts have raised concerns over the sustainability of Ethena's model. If funding rates were to turn negative, as they did briefly during recent market instability, the staking rewards earned on the long side of the trade could be canceled out. This could potentially lead to a depeg of USDe from the US dollar.

Comparisons to UST and Three Arrows Capital

Ethena's USDe has drawn comparisons to Do Kwon's collapsed algorithmic stablecoin, UST, which also offered high "stable" yields via the Anchor protocol. 3AC's collapse occurred shortly after UST's depeg in May 2022.

Zhu Su's Imprisonment and OPNX

Following 3AC's collapse, Su spent several months in a Singaporean prison. Despite his incarceration, he has remained active in the crypto industry.

Together with his former partner Kyle Davies, Su launched OPNX, a bankruptcy claims trading platform. However, OPNX's own token has plummeted by 85% since its all-time high in August 2023.

Conclusion

While Ethena's high yields may be tempting, it is crucial for investors to understand the risks associated with its basis trade strategy. The concerns raised by experts and the cautionary tale of Three Arrows Capital's implosion underscore the need for prudent risk management in the volatile world of decentralized finance.