Situation Similar to FTX Likely for Ethena's USDe, CryptoQuant Data Suggests

The USDe stablecoin, managed by Ethena Labs, offers an enticing annual yield of 17.2%, calculated as a seven-day rolling average. This return is derived from a strategy known as a "cash and carry" trade, where an asset is bought and simultaneously shorted to earn from funding payments.

Drawing on past events like the Merge upgrade and the collapse of FTX, CryptoQuant has speculated on the necessary size of the reserve fund. With a current reserve of $32.7 million, it could support funding payments if the USDe market cap does not exceed between $3 and $4 billion. Two months post-launch, the market cap already stands at $2.3 billion.

Source: CryptoQuant

Funding payments are designed to align the prices on derivatives exchanges with those of the underlying assets. In positive market conditions, holders of long positions compensate those in short positions and the reverse occurs during downturns.

Reserve Fund Requirements

CryptoQuant, a prominent data provider, has raised concerns over potential risks if funding rates remain negative over extended periods. Should such a scenario unfold, Ethena would face considerable outflows, necessitating significant payments to long position holders. To mitigate these risks, Ethena has established a reserve fund, which would require substantial growth should USDe's market cap continue its upward trajectory.

To endure through a bear market, Ethena must maintain a 'keep rate' — the portion of revenue allocated to the reserve fund — above 32%. This level would ensure the reserve is robust enough to withstand periods of extremely negative funding rates during market downturns.