Will Ethena’s USDe Crash Like TerraUSD?



Andre Cronje, a renowned DeFi architect, has cast a speculative gaze upon Ethena Protocol’s stablecoin, USDe, probing its potential to follow the tumultuous path of TerraUSD.

These insights contrast past predictions on industry risks with the current dynamics surrounding Ethena.

The Risks Behind Ethena Protocol’s Stablecoin, USDe

Cronje reflected on his experiences with UST and FTX’s collapse. He acknowledged his mixed track record in foreseeing financial collapses within the crypto market. Still, his candid admission reflects DeFi’s unpredictable nature, emphasizing his cautious approach toward new financial instruments.

This context lays the groundwork for his scrutiny of Ethena. This is a protocol he perceives as imbued with significant risks despite its integration into seemingly secure platforms.

“There is a new primitive that is gaining a lot of traction, and I am seeing [Ethena] integrated into protocols I considered to be very low risk, but from my understanding, this new protocol is very high risk,” Cronje said.

The core of Cronje’s concerns revolves around using perpetual contracts and yield-based collateral within Ethena’s framework.

Read more: What Is Ethena Protocol and its USDe Synthetic Dollar?

Perpetual contracts allow traders to speculate on asset prices without owning the assets. According to Cronje, this mechanism introduces a high-risk element absent in traditional spot trades. By leveraging assets like stETH as collateral, USDe aims to create a stable value through a balance of long and short positions, theoretically neutralizing market volatility.

However, Cronje points out negative funding rates and market downturns could erode collateral. Therefore, it poses a significant risk to the stability of USDe.

His critique extends to the mechanism’s reliance on the “law of large numbers” for stability, drawing parallels to TerraUSD’s downfall. He argues that while the model may appear sound during market uptrends, its sustainability is questionable when conditions reverse.

“While things are going great now because the market is positive and shorting funding rates are positive because everyone is happy being long, eventually that turns, funding becomes negative, margin and collateral gets liquidated, and you have an unbacked asset,” Cronje concluded.

Andre Cronje’s skepticism about USDe’s underlying mechanics highlights the ongoing challenges in creating stable and sustainable DeFi solutions. Such sentiment is echoed by CryptoQuant’s CEO Ki Young Ju, who said, “Ethena is not DeFi; it’s CeFi with custody and execution-related risks.”

While the DeFi sector is ripe with innovation, its share of failures, most notably TerraUSD’s collapse, reflect the need for a deeper understanding of Ethena’s risk vectors.


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