Ethena USDe’s 27% Yield Raises Concerns

Ethena Labs recently launched its USDe stablecoin on the Ethereum mainnet offering an APY of 27.6%.

Investors in cryptocurrencies expressed their dissatisfaction with Ethena Labs’ recently released stablecoin on X. According to an X post from the company’s official page Ethena Labs debuted its USDe stablecoin on the public mainnet on February 19. The USDe Ethereum-based synthetic dollar now offers an annual percentage yield (APY) of 27.6%. Ethena Labs’ webpage reports that the yield exceeds the 20% offered by Anchor Protocol on Terra’s UST before the collapse of algorithmic stablecoin issuer Terra in May 2022.

The alluring yield opportunity deeply troubled the cryptocurrency community. The true worry according to anonymous DefiLlama code source 0xngmi is not Ethena’s high stablecoin yield but rather a possible yield inversion. He wrote:

“When yields invert you start losing money, and the bigger the stablecoin is the more money it loses… Previous projects tried to [close the short positions when yield turned negative], but opening/closing positions has a cost, and that ate into all yield.”

It will be challenging to sustain such high returns in a bad market according to Eitan Katz, co-founder and CEO of the decentralized money transfer protocol Kima. Ethena may need to reduce its dividend in the future. “Continuous market growth and the ability to manage risks effectively are the main factors that determine [USDe’s] sustainability.

If done right these can provide stability although it is highly unlikely in the crypto industry. According to its homepage, Ethena has over 4,460 registered users and $297.9 million in total locked value. According to DefiLama statistics, the USD’s market value increased by 20.6% in the last day to $291.93 million.

On February 20, the founder of The Daily Gwei and angel investor Anthony Sassano stated on X that the investor’s apprehension regarding Ethena’s yield is a positive indication for the cryptocurrency sector. He wrote:

This is very different from the last cycle where people questioning things were the minority and were just told that they were “coping” over not making money on Ponzis like Terra/Anchor/UST. I’m very glad to see lots of people questioning Ethena’s design and asking how they can offer things like 20%+ yield and also exploring what all of the underlying risks are.

On February 16, Ethena Labs reported that it had raised $14 million in funding with support from other investors as well as venture capital company Dragonfly. In 2023, the company additionally raised $6 million to develop Ethereum-based decentralized finance solutions from Binance Labs, Gemini, Bybit, OKX Ventures, and Deribit.