Ethena’s $400m USDe token sparks renewed debate over stablecoin label

Don’t call it a stablecoin.

With its eye-popping yield and novel design, Ethena’s “synthetic dollar,” USDe, has attracted major investors as it quickly became one of the 10 most popular crypto tokens pegged to the US dollar, with a market capitalisation just over $400 million.

But its recent launch has also drawn scrutiny from prominent crypto investors and developers who say it is too risky to be considered a “stablecoin” in the mould of other dollar-pegged tokens, like Circle’s USDC or MakerDAO’s DAI.

Ethena founder Guy Young agrees.

“We’re just trying to make it explicitly clear that this product does actually look very different to a normal stablecoin,” Young said Thursday on a live online forum in which he addressed recent criticism of USDe.

“But I think we also hear the message that obviously there are certain elements of this where you can immediately start to think that this is a normal stablecoin. So something like the ticker, for example, is not something that we put as much thought into,” he said.

Stablecoins are one of the few crypto products to have found consistent use in the real world. Their relatively stable value has served as a blockchain-based refuge for people living in hyperinflationary economies as well as for traders wary of more volatile cryptocurrencies.

The debate surrounding USDe has cast a spotlight on the most vexing challenge facing stablecoin developers: how to balance demands for stability, scalability, and an industry obsession with freedom from regulatory oversight — “decentralisation” or “censorship resistance” in crypto parlance.

A Goldilocks stablecoin

Ahead of its launch, Young told DL News USDe wouldn’t be the most decentralised stablecoin — or the largest. But it had found a sweet spot.

Unlike Tether’s USDT or Circle’s USDC, which are backed with cash equivalents like US Treasuries, USDe is backed with Ether and Ether derivatives.

Unlike with other Ether-backed stablecoins, users can mint USDe with about $1 in Ether. Typically, such stablecoins are over-collateralized. While that limits how large they can grow — a user can borrow only so much if they need to put up $2 of Ether for every dollar of stablecoin — it also protects against Ether’s volatility, ensuring the stablecoin is always fully backed.

Ethena claims to have effectively solved the over-collateralization requirement with a novel design: It opens short derivatives positions on centralised exchanges to offset the long spot positions represented by users’ deposited assets.

In addition to keeping USDe at its peg to the US dollar, this would generate yield that users could tap into by locking up their USDe. Annualised, that yield was just over 24% on Friday.

The design would create a dollar-pegged token whose collateral assets were held outside the US banking system, according to Young. Although it would not be perfectly decentralised — the collateral would be stored with crypto custodians such as Fireblocks for safekeeping — it would be able to grow far larger than Ether-backed competitors like Liquity’s LUSD.

“We basically want to be within the top three stablecoins,” Young said ahead of its launch.

Terra’s implosion

But some said it was too good to be true.

“Given that we saw Terra blow up after offering 20% yield on UST, everyone’s suddenly like, ‘Oh my God, we just re-invented Terra, it’s a new Ponzi, how can you be offering 27% yield,’” Ethereum influencer and Ethena Labs investor Anthony Sassano said Tuesday on his YouTube show, The Daily Gwei, summarising much of the debate around USDe.

The Terra blockchain and its related stablecoin, UST, brought the industry to its knees in 2022 when UST lost its peg to the US dollar. Sceptics had repeatedly warned UST was unstable, but its market capitalization grew to nearly $20 billion because of its promise that holders could earn 20% annualised yield by depositing it in a sister protocol called Anchor.

USDe differs from UST in a key way: UST was unbacked, instead holding its peg through automated arbitrage with another Terra-issued token.

Nevertheless, some of USDe’s critics said that it would inevitably lose its peg, or that its peg stability mechanism might fail during an industry-wide downturn.

Others pointed to a pair of struggling projects that tried something very similar, the Solana-based UXD and the Ethereum-based Lemma.

In short: it’s no Terra, but it’s riskier than, say, USDC, according to critics.

Ethena Labs stopped marketing USDe as a stablecoin in October, after it received criticism from Columbia Business School professor Austin Campbell.

“We have called it a synthetic dollar which we think captures the essence of the product,” Young said on X Wednesday.

In response to the criticism, Ethena has taken additional steps to distance itself from other stablecoins.

It added a disclaimer to its website that users must accept before minting USDe.

“Ethena’s USDe is not the same as a fiat stablecoin like USDC or USDT. USDe is a synthetic dollar, collateralized with crypto assets and corresponding short futures positions. This means that the risks involved are inherently different,” the project states on its site.

Ethena also added a disclaimer to the beginning of USDe’s technical documentation.

While defending USDe’s design, Young issued a sort of a mea culpa Thursday.

“After what we saw last cycle, we just need to be more diligent,” he said on the forum, in an apparent reference to Terra. “This is both on the Ethena side, but then also as an industry, just think about how we’re marketing products to users who might not sort of understand them as well as we do.”

He also invited critics of the company’s branding to suggest alternatives.

“[I’m] more than happy for you to sort of jump in and guide us with any sort of suggested changes,” he said.

Aleks Gilbert is a New York based reporter covering DeFi. Got a tip? Email him at aleks@dlnews.com.