Ethena Lab’s Bitcoin-Backed USDe Sparks Concern : Terra-LUNA Déjà Vu

The post Ethena Lab’s Bitcoin-Backed USDe Sparks Concern : Terra-LUNA Déjà Vu appeared first on Coinpedia Fintech News

Ethena Lab has announced that it will back its USDe synthetic dollar with Bitcoin (BTC).

Ethena works to provide derivative infrastructure to transform Ethereum into the very first crypto-native yield-bearing synthetic dollar. It doesn’t only rely on the banking system: USDe. This decision has resulted in concern among crypto experts regarding potential market crashes that could await, similar to the Terra-LUNA crisis.

Terra-LUNA Crisis and Ethena’s Backing USDe with Bitcoin

Experts, including CEO Ki Young Ju have drawn similarities between Ethena Lab’s backing USDe with Bitcoin and the Terra-LUNA crisis. The latter maintained a stablecoin peg with Bitcoin reserves, which led to market crashes and bankruptcies in the crypto community.

Ki Young Ju also warns that Ethena’s decision can risk a contagion effect, especially during bear markets when maintaining a delta-neutral strategy for BTC, which becomes way more complicated. In fact, he is concerned explicitly about Ethena’s plan in selling BTC in order to stabilize USDe;s peg in times of market downturns.

Also Read : Ethena Launches Above $1 Billion As ENA Price Surges By 60%!

Synthetic USDe of Ethena

Ethena Labs considers that leveraging Bitcoin is essential for the significant growth of its USDe synthetic dollar which aims to increase its market cap from $2 billion to $10 billion. In fact, users can obtain USDe by depositing various stablecoins like USDT, FRAX, DAI, crvUSD, and mkUSD.

Concerns about the USDe Protocol

USDe, unlike Ethena’s conventional stablecoins, engages in a unique process which does not rely directly on either fiat or asset backing. It instead has a derivative hedging against the collateral positions as well as an arbitrage system to mint and redeem design for maintaining its peg to the USD. 

However, Ethena’s USDe is now seen as a new protocol rather than a stablecoin. Aave, a major DeFi platform, aims to remove MakerDAO’s DAI as collateral due to MakerDAO’s proposal to allocate 1 billion DAI stablecoin. This is almost 20% of its total supply to USDe. Aave Chan, founder Marc Zeller has also expressed concerns about the potential contagion risk that is associated with this decision.

If we see the market reaction, Ethena’s native coin ENA’s price has dropped by 9% in the last 24 hours with current price as $0.922.

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