Ethena Labs launched its USDe synthetic dollar on Feb. 21, causing a stir among analysts for its double-digit yield. “Crypto Twitter” seemingly hasn’t stopped talking about it since, with some praising the project’s novel mechanism while others decry its risks.

The latest crypto heavyweight to sound the alarm on USDe is Fantom and Yearn Finance founder Andre Cronje. Cronje took to X yesterday to say that when market conditions change, USDe can lose its collateral.

“There is a new primitive that is gaining a lot of traction,” Cronje posted on April 3, “and I am seeing it integrated into protocols I considered to be very low risk, but from my (perhaps incorrect) understanding, this new protocol is very high risk.”

Cronje pointed out the mechanism that USDe uses, underscoring the importance of funding rates in Ethena’s architecture and how, if these turn, triggering liquidations, the asset could suddenly lose its backing.

So “while things are great now,” he said, “because everyone is happy long,” sentiment can easily change.

The anonymous co-founder of Alchemix Finance, Scoopy Trooples, agreed with Cronje’s tweet, which now has over 2,000 likes, and said, “I’ve been showing concern for it at the risk of being labeled a midwit.”

Liquidations Aren’t Possible

Evgeny Gaevoy, CEO of algorithmic trading firm Wintermute, also responded to Cronje’s post. According to Gaevoy, liquidations aren’t of concern. The problem, he explained, is custodians, adding that the risk resembles FTX more than it does LUNA.

Removing liquidations from the risk profile is something MonetSupply, the pseudonymous co-founder of Block Analitica, a risk intelligence platform for DeFi, agrees with.

He also highlighted custody risk, calling it “one of the more significant risks.” MonetSupply addressed a number of concerns, debunking several while pointing out others, including exchange solvency and Ethena entity risk, i.e., internal keys getting compromised.

Ethena’s Explosive Growth

USDe, Ethena’s synthetic stablecoin, backs the token, which is pegged to $1, with staked Ether while also hedging stETH with short ETH positions on centralized exchanges. Both stETH and short positions contribute to yield that’s passed on to USDe holders.

It has since ballooned to a $1.3 billion market cap, reaching the top 5 on Coingecko. Ethena also completed its ENA airdrop yesterday, skyrocketing the network to a $1 billion market cap.

Ethena’s USDe has been compared with Terra’s UST stablecoin. In 2022, Terraform Labs – led by the now-detained Do Kwon – launched a native token, LUNA, and an algorithmic stablecoin, UST, which was backed by LUNA. UST lost its peg after a sharp drop in the price of LUNA, which caused a downward price spiral and run on deposits which wiped out nearly $50 billion of UST’s market cap in a matter of days.

However, unlike UST, USDe is backed by stETH and, as of today, BTC.

Completely Different Assets

“I don’t see any comparison between Ethena and Terra/Luna aside from the general category of stablecoin,” said Nic Carter, general partner at Castle Island Ventures.

Carter explained to The Defiant that Ethena is a straightforward delta-neutral stablecoin which has existed in a variety of contexts in the past and “should be able to” withstand any number of market conditions.

On the other hand, Carter said Terra “was effectively unbacked” and offered a fixed 20% rate, which forced the company to continually raise capital to deliver it.

His remarks echoed those of Ryan Watkins, who has been a vocal supporter of Ethena. Watkins told The Defiant that the FUD surrounding Ethena originates from the aforementioned LUNA collapse.

“Nothing has changed,” Watkins told The Defiant, adding he thinks “everyone has PTSD from Terra.”

Chasing Clout

If most of the risks are unwarranted or are clearly stated by the protocol, why are people so vocal about them?

Nic Carter ventured an answer.

“I honestly think because post-2022 collapse, a lot of people realized that there was significant clout to be achieved by being publicly bearish about high-profile projects ahead of time (as so many major projects did collapse) and are trying to get these criticisms in, in case they do indeed collapse,” he told The Defiant.

Carter concluded he is “convinced that Ethena is a sound system.”