The issuance of USDe plummeted by 6.5 billion USD, and Ethena is facing a liquidity crisis and a test of trust.

Original Title: “USDe issuance scale plummets by 6.5 billion USD, but Ethena faces even bigger problems”

Original author: Azuma, Odaily Planet Daily

Ethena is experiencing the largest outflow of funds since its inception.

On-chain data shows that the circulating supply of USDe, the main stablecoin product under Ethena, has fallen to 8.395 billion, a decrease of about 6.5 billion from the peak data of nearly 14.8 billion at the beginning of October. Although it can't be said to have been “halved,” the decline is already quite remarkable.

Recently, there have been frequent security incidents in DeFi, particularly with the two interest-bearing stablecoins Stream Finance (xUSD) and Stable Labs (USDX), which are said to use a similar Delta neutral model as Ethena, both experiencing consecutive crashes. There are rumors that the trigger for these crashes may be the breaking of the neutral balance due to the market turmoil on October 11, forced by CEX's ADL, coupled with the profound memory of USDe temporarily breaking its peg price on Binance at that time. Currently, there is a large-scale FUD surrounding Ethena.

Is ### USDe still safe?

Considering the current market size of Ethena, if any unexpected events occur, it is highly likely to brew a black swan event comparable to that of Terra back in the day… So, has Ethena really encountered any issues? Is the outflow of funds truly a result of risk aversion? Can we still confidently continue to deploy funds into USDe and its derivative strategies?

To conclude, I personally tend to believe that: Ethena's current strategy is still operating normally; although the risk aversion sentiment surrounding DeFi has somewhat intensified the outflow of funds from Ethena, it is not the main reason; the current safety status of USDe remains relatively stable, but it is advisable to avoid circular lending as much as possible.

The reasons for recognizing Ethena's current operational status are mainly two points.

One aspect is that, unlike most interest-bearing stablecoins that do not clearly disclose their position structure, leverage multiples, hedging exchanges, or even clearing risk parameters, Ethena can be considered a benchmark in the industry in terms of transparency. You can clearly see reserve information and proof, position distribution and proportions, implementation yield status, and other elements directly on the Ethena official website.

The second point is the issue of neutral strategy imbalance caused by ADL mentioned earlier. It is rumored that Ethena has signed ADL exemption agreements with certain exchanges, but this has never been confirmed, so we will set it aside for now. Even without exemption clauses, Ethena is relatively less affected by ADL. This is because it can be seen from its public strategies that Ethena primarily chooses BTC, ETH, and SOL as its hedging assets (with BNB, HYPE, and XRP having a very small proportion). The volatility of these three major assets during the significant crash on October 11 was already relatively low, and the counterparties had greater capacity to bear the risks. ADL is actually more likely to occur in the altcoin market, where volatility is higher and counterparties have lower capacity for risk. Therefore, the ones experiencing severe issues are often those protocols that lack transparency (which may have overly aggressive strategies compared to their plans, or may even be completely non-neutral).

As for the main reasons for the outflow of Ethena funds, they can also be attributed to two points. First, with the cooling of market sentiment (especially after October 11), the arbitrage space between the futures and spot markets has narrowed, leading to a simultaneous decrease in protocol yields and the annualized yield of sUSDe (which has dropped to 4.64% as of the time of writing). Compared to the base interest rates of mainstream lending markets such as Aave and Spark, it no longer has a significant advantage, causing some funds to choose other interest-bearing paths; second, the price volatility of USDe on Binance on October 11 heightened the market's risk awareness regarding circular lending. In addition, the decrease in yields on both off-chain (CEX reducing subsidy intensity) and on-chain sides has led to a large amount of funds unwinding circular loans and withdrawing their capital.

Based on the above logic, we believe that Ethena and USDe are currently still maintaining a relatively stable operating state. Although this round of capital outflow has exceeded expectations to some extent due to extreme market conditions and security events, the main reason can still be attributed to the decrease in attractiveness caused by the shrinking arbitrage space under the cold market sentiment. This is exactly determined by the design logic of Ethena – affected by market environment fluctuations, the protocol's yield and capital attractiveness will also fluctuate in sync.

More severe tests: scalability

Compared to the phase-out of funds, a more severe problem facing Ethena is that its Delta-neutral model, which relies on the perpetual contract market for survival, seems to have encountered a bottleneck in terms of scalability.

On November 6, DeFi bigwig Mindao commented on the recent collapse of neutral strategy stablecoins, stating: “The long-term returns of this type of strategy will converge to the level of government bonds (or even lower), liquidity is limited by exchange OI, and counterparty risk is entirely in the black box of CEX. This model has been completely falsified… They cannot scale, and ultimately are just niche financial products, and cannot compete with fiat stablecoins.”

This is akin to “The Truman Show”; Ethena once thrived in a limited small world, but this small world was constrained by factors such as the position size of the perpetual contract market and the liquidity and infrastructure conditions of trading platforms. In contrast, USDT, which Ethena aspires to challenge, exists in an unrestricted larger world. This inherent difference in growth environment may be the greatest challenge facing Ethena.