- The amount of Ethena's USDe in circulation fell 40% over the past month.
- Low funding rates caused by instability in the crypto markets is driving the decline.
- More interest rate cuts from the Federal Reserve could turn things around.
The supply of Ethena’s USDe has plummeted over the past month as sustained crypto market caution drives traders away from risky bets.
The supply of the dollar-pegged token fell from an all-time high of almost $15 billion at the start of October to around $8.5 billion — a more than 40% drop in just over a month, per DefiLlama data.
Crypto market instability has scared both those who use USDe in DeFi, and the traders whose activity the dollar-pegged token’s yield depends on, according to Colin Butler, head of global financing at crypto treasury firm Mega Matrix, which holds around $3 million worth of Ethena’s governance token on its books.
When perpetual futures funding turns low or negative, protocol revenue and staked USDe yields compress, making the token less attractive versus plain cash, he told DL News.
Unlike popular stablecoins such as Tether’s USDT and Circle’s USDC, Ethena’s USDe token isn’t backed one-to-one by dollars.
It instead hedges deposits used to mint USDe with bearish perpetual futures bets on centralised crypto exchanges, which it says creates a stable backing that is unaffected by price swings.
The issue is that USDe’s popularity is tied to the yield users can earn by staking it. This yield mainly comes from the funding rate the protocol earns from the bearish bets that back USDe.
This funding rate rises the more demand there is for bullish bets. So when traders are cautious, the yield USDe stakers earn drops.
“The reflexive nature of the system, where yield drives demand, means that lower funding quickly translates to slower growth or even redemptions,” Amir Hajian, a researcher at crypto market maker Keyrock, told DL News.
Ethena Labs, the firm behind the Ethena protocol and USDe token, declined a request for comment.
October hangover
The crypto market is stabilising following a bloody October which saw Bitcoin drop below $100,000 for the first time since June.
Driving the fall were concerns over the ongoing US government shutdown and uncertainty over whether the Federal Reserve will cut interest rates in December.
Now these headwinds appear to be abating.
On Sunday, a bipartisan coalition in the US Senate moved to break the deadlock that has incapacitated Washington for 40 days, voting to advance a bill that would finally reopen the government.
CME Group’s FedWatch tool puts the likelihood of a December rate cut at around 65%.
If the Senate can resolve the government shutdown and the Fed decides to cut interest rates at its December 10 meeting, it could spur confidence in risk assets like crypto, benefiting Ethena and USDe.
“When the Fed begins cutting rates, positive funding environments reemerge since risk appetite returns,” Hajian said. “If that cycle plays out again, Ethena is well-positioned to offer among the most attractive yields in the market once conditions stabilise.”
Compounding issues
It’s not just the low funding rates taking their toll on USDe, however.
On October 10, the crypto market experienced an unprecedented $19 billion leverage wipeout.
In the wake of the chaos, Binance, the biggest crypto exchange, acknowledged disruptions on its platform linked to the event and said it would review and compensate losses directly caused by its system failures.
“That episode triggered heavy redemptions and deleveraging,” Butler said. “Although it was not Ethena’s fault (Binance’s mistake), USDe took the hit.”
The leverage crash also impacted those using USDe in DeFi.
The token is a popular choice for so-called looping trades, where holders repeatedly borrow stablecoins against their staked USDe to juice their yields.
Since early October, derivatives funding rates have fallen sharply, eroding the carry that made these loops attractive, Hajian said.
The crash also revealed how risky some looping strategies can be.
“After the crash, research flagged $1 billion of staked USDe loop trades at risk,” Butler said. “Many unwind when APY falls or liquidation risk rises, shrinking USDe demand.”
Despite the supply drawdown, USDe is still the third biggest dollar-pegged crypto behind USDT and USDC.
Tim Craig is DL News’ Edinburgh-based DeFi correspondent. Reach out to him with tips at tim@dlnews.com.
