Binance-backed Ethena gives USDe stablecoin holders a 27% annual return. He achieves this return mostly by shorting Ethereum futures. The platform has facilitated the issuance of more than $287 million in USD since its launch. However, there are also warnings from experts for the platform.
Binance-backed DeFi platform attracted record funds with 27% APY!
Decentralized finance (DeFi) platform Ethena promises to provide 27% annual returns to USDe token holders. There are also some criticisms about the model used by the platform, which is also included in the incubation program of the Binance exchange. Amidst these criticisms, there has been a huge inflow of money since it started operating. As of today, users have minted more than $287 million USD. More than $50 million of that came after the platform went public on Monday. The platform calculates the 27% return in seven-day intervals. Additionally, this may change each week depending on key factors.
Users can deposit stablecoins such as Tether (USDT), Frax (FRAX), Dai (DAI), Curve USD (crvUSD) and mkUSD to receive Ethena’s USDe, which can then be staked. It takes seven days for the stake to be opened. It is possible to supply USDe tokens in the stake to other DeFi platforms for an additional return.
How does the system work?
Ethena calls USDe a synthetic dollar that largely mimics an algorithmic stablecoin. The tokens have a target peg of $1, which is minted as Ethereum (ETH) tokens are deposited into the platform. The platform generates returns from two sources:
- Deposit ETH to a validator and earn 5% on the capital.
- Shorting ETH futures to capture the funding rate, which is estimated to be over 20% based on historical modeling.
This futures trading mechanism is similar to a “cash and carry” trade, in which a trader takes a long position in an asset while simultaneously selling the underlying derivative. Theoretically, such a process is directionless. Additionally, it makes money from funding payments rather than the price movement of the underlying asset.
The concept of the platform became a matter of discussion!
cryptokoin.comAs you can follow from , there were other projects that gave similar high APY. While flows are important, some segments of the crypto community criticize the concept. They say this has been tested before and it didn’t work. ‘0xngmi’, one of the founding partners of DeFillama, shared the following on the subject:
There have been 2 projects that tried this before and both gave up because they lost money due to reversal of returns. When returns reverse, you start losing money, and the larger the stablecoin, the more money it loses.
Others say the concept could face tests in how its risk is managed. “While new stablecoin experiments are welcome, Ethena has a few parts that will likely struggle, especially around risk management,” Doo Wan Nam, founder of governance research firm Stable Lab, said in a Telegram chat.
Manager of Binance-backed project responds to concerns
Conor Ryder, Ethena’s director of research, addressed some of these concerns. Ryder stated that the protocol went live with its parameters based on past tests that do not contain extreme risks. Ryder said demand for longing ETH is currently high. Therefore, futures rates for shorting cryptocurrencies are expected to remain high, he noted. In this context, Ryder made the following statement:
There is a clear demand to go long with leverage in crypto. Deep pools of capital are reluctant to lend capital on the short side of this long leverage. Negative funding rates are a feature of the system rather than a bug. It was built with USDe negative funding in mind.
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