- Ethena’s USDe faced strong criticism after the MakerDAO deal.
- Aave proposed the delisting of DAI as collateral against MakerDAO move.
Ethena’s [ENA] so-called ‘synthetic dollar,’ USDe, is back on the radar after a recent deal with MakerDAO [MKR].
The deal offered 100 million Dai [DAI] to farm USDe. Reportedly, the 100 million DAI is about 2% of the DAI backing, which is okay.
However, the deal will be extended to 600 million DAI over time, exposing 12% of DAI’s reserve assets to risk.
Marc Zeller, founder of lending protocol Aave [AAVE], described the move as a “reckless” and high-risk exposure that could have a contagion effect across the market.
He said,
“1B $DAI, minted out of thin air (20% of whole supply), into a non-battle-tested protocol with zero risk mitigation, weak oracles in less than a month, for asset hyper sensible to market conditions is the definition of reckless.”
Zeller proposed delisting DAI as collateral in the Aave protocol to cushion it from MakerDAO’s “reckless” risks.
Ethena’s USDe inherent risks
For the uninitiated, this isn’t the first controversy to hit USDe.
In February, the synthetic dollar raised eyebrows. It was outrightly marketed as a ‘stablecoin,’ offering a high yield of 27%, tipping users to call it the next TerraLuna.
Unlike USD Coin [USDC], which is backed by US treasuries, cash, etc., USDe is backed by different holdings on Ethereum [ETH].
These holdings include staked ETH and short ETH hedges heavily relying on CEX (centralized exchanges) liquidity.
Unfortunately, USDe design faced several risks. CEXes could go under like FTX did. Additionally, Funding Rates could flip negative during bear markets, affecting short ETH hedges.
So, a USDe depeg could have a broad ripple effect.
However, Conor Ryder, Ethena’s Head of Research, acknowledged these risks but emphasized that, in a worst-case scenario, they could be handled through Ethena’s insurance fund.
Even so, the recent deal with MakerDAO raises similar concerns across the DeFi sector.
Reacting to the development, Andre Cronje, founder of Fantom [FTM], underscored how bearish pressure could affect the asset.
“Eventually, that turns negative, funding becomes negative, margin/collateral gets liquidated, and you have an unbacked asset.”
He reiterated, “it works until it doesn’t.”
Another user claimed,
“Issuing $100 mil DAI to farm USDe is one thing; issuing billions is asking to get hurt.”
Responding to Cronje, Ethena Labs founder, Guy Young, acknowledged USDe’s inherent risks but dismissed concerns about the MakerDAO deal.
“These aren’t mid-curve concerns at all; you rightly point out risks that absolutely do exist here.”
Apart from Aave, it remains to be seen whether other protocols will re-adjust their risk mitigation to MakerDAO’s alleged “reckless” move.
