Does Ethena’s “synthetic dollar” pose a new systemic risk to decentralized finance (DeFi)?
While USDe likes not to be labeled as a stablecoin, it is increasingly being used as such by some of the biggest players in DeFi. However, some are concerned that treating USDe as a centralized stablecoin changes its risk profile as collateral.
An influential member of the MakerDAO community known as “ImperiumPaper” has pointed out potential conflicts of interest between risk advisors working for Aave and Maker, who also have (or had) ties to Ethena. The situation is compared to “a real estate agent who represents both buyer and seller.”
Read more: Ethena offers 27% on stablecoins, but where does the return come from?
An early-stage Aave board proposal to peg USDe 1:1 to Tether’s USDT has raised concerns about potential conflicts of interest, especially given the contrast in depeg risks between the two assets.
The proposal, which was posted on Aave’s board forums yesterday and is currently in the Request for Comment stage, suggests that “the USDe price should be hard coded to match the USDT price in Aave’s price feeds .’
This would replace the current Chainlink USDe/USD oracle in an effort to avoid liquidations that “prove unprofitable for liquidators, potentially leaving Aave in bad debt.”
However, both co-authors of the proposal, risk managers ChaosLabs and LlamaRisk, actively work with or have previously worked for Ethena.
The criticism of the proposal boils down to the fact that Tether is (ostensibly) fully backed by off-chain assets, guaranteeing the ability to exchange USDT for USD off-chain 1:1.
Read more: Tether’s Q3 earnings prove it can’t stop making secured loans
USDe, on the other hand, is supported by a delta-neutral balance of long and short ETH positions, exposed to the risk of “persistent negative funding rates” that This can happen when market sentiment turns bearish.
One user compared the move to an ‘aggressive growth proposal’, while another criticized the circular logic of recognizing the different risks and then treating the assets as if they had the same value rather than taking appropriate steps.
ImperiumPaper also previously raised similar concerns following a proposal to expose USDS (the new branded version of DAI) to USDe and sUSDe via Spark. They also highlighted issues with the timing of such a suggestion.
The MakerDAO community leader has been a fierce critic of Maker in recent months, selling their stake in the board after a wobbly rebranding and concerns about an over-indebted founder endangering the project’s symbolic MKR.
Crooked, anyone?
Read more: MakerDAO could back a billion Dai with Ethena’s ‘synthetic dollar’ USDe
In response, Ethena founder Guy Young has denied any conflict, highlighting the project’s risk committee, which was created to “provide external discipline and accountability regarding the ongoing management of the product.”
He also points to a recent example in which LlamaRisk proposes stricter measures for using sUSDe as collateral for Aave.
On Monday, Seraphim Czecker, Ethena’s former head of growth (or “risk taking”), suddenly resigned, stating that the company is “entering another phase in its growth.”
However, Ethena shows no signs of slowing down.
Yesterday Young referred to ‘Aavethena’ (where the combined deposits of sUSDe and USDe on Aave go to a total $1 billion) as a “nice little proof of concept.”
Earlier today, a roadmap for 2025 was titled Convergence was published, outlining Ethena’s plans to further integrate with traditional finance and “completely change the fate of DeFi.”
Ethena’s Terra flashbacks
At launch, Ethena’s high yield on its (don’t call it) stablecoin USDe drew comparisons to Terra’s UST, which imploded spectacularly in May 2022. While the comparisons may have been unfair, given the different risk profiles of the two assets, users were understandably wary after the fallout from the UST collapse plunged DeFi into a deep and debilitating bear market.
Read more: GRAPHIC: Do Kwon’s extradition has seen a total of 23 developments
Do Kwon, the architect of Terra’s UST and LUNA, which together wiped out an estimated $40 billion yesterday, pleaded not guilty to fraud charges after being extradited to the US earlier this week.
