Holders of USDe, a fast-growing altcoin and stablecoin, should closely monitor the financial reserve fund to mitigate risks generated by negative financing amounts, according to a report developed by data provider CryptoQuant.
CryptoQuant warns about altcoin USDe
Ethena Labs, the USDe insider, offers a lucrative 17.2% annualized return (listed last week as moving) to figures who stake USDe or other altcoin and stablecoins on their platform. However, a small return is generated through a tokenized “cash and carry” trading strategy. This strategy involves simultaneously purchasing an asset and shorting the same asset to capture financing payments.
Funding amounts play an important role in maintaining price parity between derivative contracts and their underlying assets. Going long in the bulls, those with long positions pay off the short positions, and vice versa during downtrends. However, CryptoQuant warns that prolonged negative funding rates are a significant force for USDe. Negative components of funding Ethena’s short positions will have to pay out the significant amount they hold on long positions.
Ethena allocated funds for the stability of the coin
To address this potential problem, Ethena allocated capital into a reserve fund. This fund acts as a buffer, ensuring that USDe remains fixed to the US dollar even if money is lost in short positions. However, CryptoQuant is highlighted by the fact that the capacity of the reserve fund is increasing due to the growth of USDe in the market.
The report cites historical examples of Ether (ETH) funding rates following major events such as the Merger surge and FTX’s holdings. Ethena’s current reserve fund of 32.7 million is drawn to only have enough capital available to sustain negative energy payments if USDe market exposure remains below $4 billion and $3 billion respectively. The market cap of USDe has already risen by 2.3 billion just two months after its launch on the market.
Investors have a duty to monitor
CryptoQuant also highlights the strengthening of Ethena‘s “holding custody”, which represents the portion of the generated revenue allocated to the reserve fund. According to the report, USDe continues to remain above 32% to hold to maintain stability in the bear market. However, it will ensure that the reserve fund accumulates enough capital to withstand periods of extreme negative funding rates.
Fundamentally, the high returns offered by USDe also bring a layer of risk. While tokenized cash-and-carry may seem lucrative, its vulnerability to negative funding rates should be kept in brief by the health of the reserve fund. Investors are advised to adjust Ethena‘s retention rate and stay informed about general market conditions in order to adjust retention rates for their USDe assets.
To stay up-to-date with the breaking news, follow us on Twitter, Facebook, and Instagram. Join our Telegram and YouTube channel
