The Crypto Roundup: 10 June 2024

Ethena, a new crypto project offering sky-high yields of around 37%, is attracting billions of dollars in investment, but also sparking skepticism in the market through its use of a so-called synthetic dollar that aims to replicate a common hedge-fund strategy.

The protocol and its USDe token utilize a crypto version of the "basis trade," a strategy that exploits price differences between spot and futures markets in what’s known as a cash-and-carry trade. While such trades have been profitable amid rising token prices, the high yields associated with Ethena evoke memories of the disastrous collapse of TerraUSD in 2022.

Experts warn that Ethena's complex structure could lead to significant losses if the strategy falters, with Robert Leshner of Robot Ventures suggesting it’s “essentially a hedge fund in token form, managing a risky strategy across multiple exchange venues.“ Per his words, the “worst-case scenario” is simply underperformance due to unforeseen market conditions.

Ethena works with traders depositing stETH (an Ether liquid staking derivative token) and other accepted tokens to create USDe through an automated system. Ethena Labs, the project's creators, then open short positions via futures and perpetual swaps on various exchanges to capture the high funding rates paid by leveraged traders.

Ethena isn't the first protocol using basis trades as USDL from Lemma Finance attempts a similar strategy. Previous attempts have failed, particularly those relying heavily on decentralized futures markets with lower liquidity.

Ethena acknowledges potential risks on its website, including funding rate fluctuations, exchange risk (heightened after FTX's downfall), custodial risk (reliance on third-party storage), and collateral risk (associated with stETH's volatility).