According to data provider CryptoQuant, investors of USDe should keep an eye on the project's reserve fund to minimize risks associated with the possibility of a negative funding rate.
Investors that stake USDe or other stablecoins on the platform can now get an annual yield of 17.2%, which is a rolling average over the last seven days, from Ethena Labs, the company that created the USDe stablecoin. The yield is produced by a tokenized "cash and carry" deal, in which an asset is bought and then shorted to generate financing payments.
One strategy to maintain the asset prices on derivatives exchanges near the underlying assets is funding. Long position holders compensate short position holders in a bull market, and vice versa in a down market.
Ethena's short holdings will need to make substantial payments to those holding long positions if financing rates are negative for an extended period of time, according to CryptoQuant.
For this reason, Ethena has contributed money to a reserve fund, but if the market value of USDe keeps rising, the fund will need to expand considerably.
A CryptoQuant analysis indicates that the present reserve fund of $32.7 million could only support funding payments if USDe's market cap were below $4 billion and $3 billion, respectively, using samples of ether (ETH) funding rates after the Merge upgrade and the FTX crash. Two months after its issuance, USDe's market capitalization has increased to $2.3 billion.
According to the research, Ethena's retain rate—the percentage of revenue allotted to the reserve fund—must continue to be higher than a particular threshold, contingent upon financing rates, in order to be viable.
According to the research, "in order for Ethena to withstand a bear market period." It would have to maintain a retention rate higher than 32%. According to the paper, "this would enable the reserve fund to be sufficiently large to withstand a period of extremely negative funding rates during a bear market."
April 2024, Cryptoniteuae