Fantom creator Andre Cronje is concerned that incentives behind Ethena Labs’ USDe could lead to the next Terra-like meltdown. Cronje is considered one of the most influential thought leaders in decentralized finance (DeFi).

Without mentioning the protocol or its synthetic dollar directly by name, Cronje shared a note about his concerns regarding the risk management behind Ethena Labs, highlighting the issue with funding rates in perpetual futures contracts. In an April 3 X post, Cronje wrote:

“While things are going great now (because the market is positive and shorting funding rates are positive [because everyone is happy being long]), eventually that turns, funding becomes negative, margin/collateral gets liquidated, and you have an unbacked asset.”

Ethena’s USDe stablecoin yield first caused widespread concerns on Feb. 19, when it launched on public mainnet with a 27.6% annual percentage yield (APY), which was considerably higher than the 20% yield on the failed TerraUSD (UST) on the Anchor protocol, which collapsed in May 2022, erasing tens of billions of dollars of value in a few days.

Following the mainnet launch, Ethena Labs’ founder Guy Young told Cointelegraph that the widespread concerns are a sign of a maturing industry with a healthy amount of skepticism, rising from the ashes of the Terra collapse.

When asked about the concerns related to funding rates turning negative, Young said it’s not a major concern, highlighting that funding rates only turned negative to below -3% for a week during 2022, which was among the worst years for the crypto market.

Ethena also employs other measures for when funding rates turn negative, including an emergency insurance fund and arbitrage mechanics, Guy told Cointelegraph:

“Think of this as an exogenous interest rate for the system where if the interest rate is too low, that's just the market telling us that the supply of USDe is too high relative to leverage demands in the system… So when the interest rate goes low, you'll expect that users will not be coming into the product and they'll be redeeming out of it, and in the process of doing so we have to lift the shorts, which allows funding to fall back to zero or above.”

While Anchor protocol’s yield was simply made up, Guy highlighted that USDe’s yield is publicly verifiable and is generated via staking returns and shorting Ether perpetual futures contracts.

According to Jae Sik Choi, an analyst at Greythorn Asset Management, Anchor protocol’s artificially inflated yield was unsustainable, unlike the dynamic yield promised by USDe.

“We saw how the real yield on Anchor was actually ~5.81% and it paid out 19.45% which is a cause for disaster as the yield backing the product is less than what it pays out… There is no mention of 'risk-free’ returns that were promoted in Anchor, as the yield is clearly stipulated and we know where it’s coming from (perpetual futures + stETH).”

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