Will Athena USD crash like TerraUSD?

Renowned Defi architect Andre Cronje is taking a speculative look at the Ethereum protocol's stablecoin USDe, testing its potential to follow TerraUSD's volatility.

These insights contrast past predictions on industry risks with the dynamics surrounding Athena now.

The Risks Behind Athena Protocol Stablecoin, USDe

Cronje reflected on his experience with the failure of UST and FTX. He acknowledged his mixed track record in foreseeing financial failures in the crypto market. Still, his candor reflects Defy's unpredictable nature, which underscores his cautious approach to new financial instruments.

This context lays the groundwork for examining Athena. This is a protocol that is known to be fraught with high risks, even though it is included in seemingly secure platforms.

“There's a new classic that's getting a lot of attention, and I'm looking at it. [Ethena] I think it's a very low risk integrated into the protocols, but in my understanding this new protocol has a very high risk,” Cronje said.

Cronje's concerns center around the use of perpetual contracts and yield-based caching in the Athena framework.

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

Fixed-term contracts allow traders to speculate on the value of an asset without owning the asset. According to Cronje, this method introduces an element of high risk not found in traditional spot trading. By using assets like stETH as collateral, USDe aims to create stable value in the balance of long and short positions, theoretically eliminating market volatility.

However, Cronje points out that negative cash flows and market downturns can erode collateral. Therefore, it poses a great risk to the stability of the USDe.

His criticism is similar to the failure of TerraUSD in favor of a strategy based on the “law of large numbers” for stability. They argue that while the model may have looked good during market reforms, its sustainability is questionable when conditions change.

“While things are going really well because the market is positive and the funding rate is positive because everyone is happy to be long, eventually that turns around, funding becomes negative, margin and collateral gets cut and you have an unfunded asset,” Cronje concluded.

Andre Cronje's skepticism about USDe's fundamental mechanics highlights the ongoing challenges of creating stable and sustainable DeFi solutions. Such a sentiment was echoed by CryptoQuant CEO Ki Young Joo, who said, “Itena is not DeFi; It is CeFi with security and execution related risks.

While the DFI sector is ripe with innovation, its share of weaknesses, particularly the TerraUSD crash, underscores the need for a deeper understanding of Etena's risk exposure.