Ethena's Bitcoin-Backed USDe Sparks Market Crash Fears

Ethena Labs' announcement of backing its USDe synthetic dollar with Bitcoin has raised concerns among crypto experts, including CryptoQuant CEO Ki Young Ju. Ju believes this move poses risks similar to the Terra LUNA-UST crisis, where maintaining a stablecoin peg using Bitcoin reserves led to a market crash. He highlights the difficulty in maintaining a delta-neutral strategy for Bitcoin during bear markets, expressing concerns about the potential sale of Bitcoin to stabilize USDe's peg in such conditions.

Ethena Labs' Bitcoin-Backed USDe Raises Concerns of a Potential Market Crash

Ethena Labs, a decentralized finance (DeFi) platform, has recently announced its intention to back its synthetic dollar, USDe, with Bitcoin. This move has raised red flags among crypto experts, who warn that it could potentially destabilize the market.

Ki Young Ju, founder and CEO of on-chain data platform CryptoQuant, is among those who have expressed skepticism about Ethena's decision. He believes that backing USDe with Bitcoin introduces the risk of a potential crisis similar to the Terra-LUNA collapse.

Terra-LUNA, a blockchain project that utilized an algorithmic stablecoin (UST), experienced a catastrophic collapse in May 2022. The Luna Foundation Guard (LFG), which was responsible for maintaining UST's peg to the US dollar, was forced to sell its vast Bitcoin reserves in an attempt to stabilize the stablecoin. However, this proved futile, and the entire Terra ecosystem imploded, leading to massive losses for investors and the bankruptcy of several crypto firms.

Ju highlights the challenges of maintaining a delta-neutral strategy for Bitcoin in a bear market. Ethena Labs plans to hold spot Bitcoin and short Bitcoin futures as part of a cash and carry trade to generate yield. However, Ju expresses concerns about the potential need to sell Bitcoin to stabilize USDe's peg if their algorithm fails during a bear market. He emphasizes the limited liquidity available in the short Bitcoin market, which could exacerbate any selling pressure.

"If there's a method to short BTC by holding some DeFi-wrapped BTC, the market size would be smaller than its TVL," said Ju. "This is a CeFi stablecoin run by a hedge fund, effective only in bull markets. Correct me if I'm wrong."

Other crypto experts share Ju's concerns. Andre Cronje, a prominent figure in the DeFi space, acknowledged the novelty of Ethena's approach but expressed reservations about its sustainability.

"I often find myself on the mid curve for an extensive amount of time. I am comfortable here. That being said, there have been events in this industry I wish I was more curious about, there have also been events I definitely didn't want to be involved in," Cronje tweeted.

Ethena claims that backing USDe with Bitcoin will enable it to scale significantly, potentially reaching a market capitalization of $10 billion. However, experts caution that USDe is a new protocol and not a stablecoin, and its yield could fluctuate based on market conditions.

Aave, a major lending protocol, recently announced its plans to remove MakerDAO's DAI stablecoin as collateral following a proposal by MakerDAO to allocate $1 billion in DAI to USDe. AAVE chancellor Marc Zeller cited the perceived contagion risk associated with Ethena's approach.

The concerns raised by crypto experts underscore the importance of careful evaluation and understanding before investing in new and innovative DeFi projects. The potential risks associated with Ethena's USDe warrant further scrutiny and transparency from the project team to ensure the stability and integrity of the broader crypto ecosystem.