Concerns Arise over Ethena Lab’s USDe, Backed by Bitcoin: Terra-LUNA Déjà Vu Revisited

Ethena Lab, a company dedicated to creating derivative infrastructure for Ethereum, has recently announced that it will be backing its USDe synthetic dollar with Bitcoin (BTC). This decision has raised concerns among experts in the crypto community, who draw parallels to the Terra-LUNA crisis.

The Terra-LUNA crisis occurred when a stablecoin pegged to Bitcoin reserves led to market crashes and bankruptcies. CEO Ki Young Ju, along with other experts, warns that Ethena’s decision to back USDe with Bitcoin could pose similar risks. Ju specifically expresses concern about Ethena’s plan to sell BTC in order to stabilize USDe’s peg during market downturns.

Despite these concerns, Ethena Labs believes that leveraging Bitcoin is crucial for the growth of its USDe synthetic dollar. The company aims to increase its market cap from $2 billion to $10 billion. Users can obtain USDe by depositing various stablecoins such as USDT, FRAX, DAI, crvUSD, and mkUSD.

There are also concerns about the USDe protocol itself. Unlike Ethena’s conventional stablecoins, USDe relies on a unique process that does not directly rely on fiat or asset backing. Instead, it has a derivative hedging system and an arbitrage system to maintain its peg to the USD. This has led to Aave, a major DeFi platform, considering removing MakerDAO’s DAI as collateral due to MakerDAO’s proposal to allocate 1 billion DAI stablecoin to USDe, which accounts for almost 20% of its total supply. Aave Chan, founder Marc Zeller, has expressed concerns about the potential contagion risk associated with this decision.

As a result of these developments, Ethena’s native coin ENA has seen a 9% drop in price over the past 24 hours, with the current price at $0.922.