Monitoring the Reserve: CryptoQuant Advises USDe Holders on Funding Rate Risks

Apr. 18, 2024.
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CryptoQuant Warns USDe Holders: Negative Funding Rates Pose Risks. Ethena's $32.7M Reserve Fund Faces Strain Amid $2.3B Market Cap Surge. Sustainability Hinges on 32% Keep Rate.

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CryptoQuant, has issued a warning to holders of the USDe stablecoin about the potential risks associated with negative funding rates. According to the firm, investors should keep a close watch on the reserve fund of Ethena Labs, the entity behind USDe, to mitigate these risks effectively.

Ethena Labs currently boasts an attractive annual yield of 17.2%, a figure based on a seven-day rolling average, for those staking USDe or other stablecoins on their platform. This yield stems from a sophisticated “cash and carry” trade strategy that involves purchasing an asset while simultaneously shorting it to capitalize on funding payments.

In the world of derivatives exchanges, funding rates are essential for ensuring that the prices of assets closely align with their underlying values. In a bullish market, holders of long positions pay those in short positions, and the reverse is true in a bearish market. CryptoQuant has pointed out that negative funding rates over an extended period could compel Ethena’s short positions to incur substantial payments to long position holders.

To prepare for such scenarios, Ethena has allocated a portion of its capital to a reserve fund. However, with the growing market cap of USDe, which has reached $2.3 billion just two months post-launch, this reserve fund might require significant expansion to remain effective.

Drawing from recent events such as the ether (ETH) funding rates post-Merge upgrade and the FTX collapse, a CryptoQuant report highlighted that Ethena’s current reserve fund of $32.7 million would only be sufficient if the market cap of USDe remains below certain thresholds—$4 billion and $3 billion, respectively.

The sustainability of this fund is also tied to Ethena’s “keep rate”—the percentage of revenue allocated to the reserve. The report stresses that to endure a bear market, Ethena would need to maintain a keep rate of at least 32%. This level would ensure the reserve fund is robust enough to withstand periods of extremely negative funding rates during market downturns, thus safeguarding investor interests and maintaining financial stability.

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