Holders of USDe, a fast-growing altcoin and stablecoin, should closely monitor the project’s reserve fund to mitigate risks associated with negative financing rates, according to a report by data provider CryptoQuant.
CryptoQuant warns about altcoin USDe
Ethena Labs, the company behind USDe, offers a lucrative 17.2% annualized return (last week’s moving average) to investors who stake USDe or other stablecoins on their platform. This attractive return is generated through a tokenized “cash and carry” trading strategy. This strategy involves simultaneously purchasing an asset and shorting the same asset to capture financing payments.
Funding rates play an important role in maintaining price parity between derivative contracts and their underlying assets. In bull markets, long position holders pay off short positions, and vice versa during bearish periods. However, CryptoQuant warns that prolonged negative funding rates pose a significant challenge to USDe. When funding rates turn negative, Ethena’s short positions will have to pay significant amounts to long position holders.
Ethena allocated funds for the stability of the coin
To address this potential problem, Ethena allocated capital into a reserve fund. This fund acts as a buffer, ensuring that USDe remains pegged to the US dollar even if money is lost on short positions. However, CryptoQuant emphasizes that the capacity of the reserve fund should increase in proportion to the growth of the market value of USDe.
The report cites historical examples of Ether (ETH) funding rates following major events such as the Merge upgrade and FTX collapse. He highlights that Ethena’s current reserve fund of $32.7 million will only be sufficient to sustain negative financing payments if USDe’s market cap remains below $4 billion and $3 billion respectively. USDe’s market cap has already risen to $2.3 billion just two months after its launch.
Investors have a duty to monitor
CryptoQuant also highlights the importance of Ethena’s “holding ratio,” which represents the portion of revenue generated that is allocated to the reserve fund. The report suggests that the retention rate must remain above 32% for the USDe to maintain stability during the bear market. This will enable the reserve fund to accumulate enough capital to withstand periods of extreme negative funding rates.
Fundamentally, the high returns offered by USDe also bring a layer of risk. While the tokenized cash-and-carry strategy appears lucrative, its vulnerability to negative funding rates requires close monitoring of the health of the reserve fund. Investors are advised to stay informed about Ethena’s holding rate adjustments and general market conditions so they can make informed decisions regarding their USDe holdings.
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