Will Athena USD collapse like Terra UST? Parameters to be observed

Ethena USDA, the synthetic US dollar protocol on Ethereum, has quickly attracted a market cap of more than $2 billion.

Unlike traditional stablecoins, USDe is not backed by physical US dollars or over-hyped with cryptocurrencies. Instead, it holds the dollar string with a sophisticated delta strategy crypto bond.

Is Etena's US Dollar Doomed? 2 key parameters to be considered

CryptoQuant Head of Research Julio Moreno emphasized the creative but risky strategy on USDe. By permanently hedging the exposure to cryptocurrency with short positions in the future, USDe generates yield in “normal” market conditions. However, this approach exposes it to specific risks, particularly funding risk.

Funding risk becomes critical in highly volatile markets where negative liquidity occurs. This means that USDe holders may face situations where Aetna needs to cover higher fees in order to maintain these positions.

In an exclusive report shared with BeinCrypto, Moreno outlined two important metrics for investors: the size of the reserve fund relative to the market price of USD and the reserve rate – the yield reinvested into the reserve fund.

“As USD market capitalization increases (as short positions become larger), funding charges become larger. In order to reliably handle the rare event of large negative funding with large market capitalizations of $5, $7.5 or $10 billion, the reserve fund would need to increase to about $40, $60 and $80 million, respectively, Moreno wrote.

To reduce risk, Moreno suggested that the USDe should keep the balance sheet above 20%, which is critical to adequately strengthen its reserves. USD emphasized that these steps are necessary to avoid the pitfalls that led to the failure of Terra UST.

Read more: Etena protocol and the US dollar What is a synthetic dollar?

The ability to quickly adjust reserves and maintain rates in response to market volatility will be critical to the USDe's sustainability as a stablecoin. Still, investors should continue to monitor reserve funds and watch prices to avoid risks.