Ethena's Yield Machine Sees $1B Outflows as Crypto Market Cools – But There's Good News

The protocol faced a challenging environment as yields from arbitraging bitcoin and ether funding rates tumbled to near-zero. Even so, its USDe token held steady to its $1 peg.

Crypto yield protocol Ethena, which earlier this year attracted over $3.6 billion in deposits, faced a major test as the crypto markets cooled off and investors withdrew the funds backing its synthetic dollar token USDe. But the token held steady to its $1 peg.

The protocol has seen nearly $1 billion in outflows since July, according to data from DefiLlama, a 27% decrease in the token's supply. The protocol's governance token, ethena (ENA), has fallen 85% from its April high.

The decline comes as funding rates for crypto perpetual futures, a key source of yield for USDe, fell to near-zero in recent weeks. The rates hit an annual 40%-70% in March.

“Lower funding rates make it less attractive to hold and stake USDe,” Julio Moreno, an analyst at CryptoQuant, told CoinDesk in an interview.

USDe uses bitcoin (BTC) and ether (ETH) as backing assets, pairing them with an equal-value short perpetual futures position on exchanges. Funding rates for perpetuals are usually positive, which means Ethena’s USDe generates revenue on its backing derivative assets.

“One of the most important risks USDe faces is an environment of sustained negative funding rates in the perpetual futures market,” said Moreno. “In this scenario, Ethena would need to pay funding in order to keep its short positions open.”

The yield offered to USDe fell to 4.4% from its March peak of over 50%, according to DefiLlama. That's lower than less risky investments such as a vanilla money-market fund or other Treasury-backed digital token offerings.

Skeptics have raised concerns about Ethena's model, likening it to the collapsed stablecoin project Terra-Luna. Terra’s algorithmic stablecoin spiraled down in May 2022 after its subsidized growth ran out of fuel, kicking off a brutal crypto winter.

Read more: Ethena Labs Divides Opinion as High Yield Stirs Memories of Terra

The current bearish market environment and flurry of withdrawals offered a chance to prove the protocol's stability.

“We are pleased with how Ethena has responded to multiple deep market corrections in the last few months,” said Guy Young, co-founder and CEO of the protocol's development firm, Ethena Labs. “Stress tests were always going to surface, and growing at the pace we were indefinitely is clearly not possible.”

The price of USDe remained stable at its $1 peg during the outflows, and the subsequent unwinding of trading positions to meet demand for withdrawals happened “all orderly with zero issues experienced on the US dollar peg,” Young added.

Ethena maintains a “rainy day” fund, known as the reserve fund, to pay for funding rates if needed.

To minimize protocol risks, the reserve should stand at least at 1% of USDe supply, said CryptoQuant's Moreno.

“This is the case at the moment, as the reserve fund stands at $45 million, which is around 1.6% of the current USDe market capitalization,” said Moreno. “Investors need to watch this key metric to assess Ethena’s risk.”

Edited by Zack Seward

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Please note that our privacy policy, terms of use, cookies, and do not sell my personal information CoinDesk is an independent fully owned subsidiary of Digital Currency Group, which also owns multiple other crypto-related businesses. CoinDesk journalists maintain a strict set of editorial policies and CoinDesk was acquired by Block in 2023.

Krisztian Sandor is a reporter on the U.S. markets team focusing on stablecoins and institutional investment. He holds BTC and ETH.

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