Ethena, a recent player in the blockchain sector, is experiencing success as demand for its offerings grows among cryptocurrency investors. As of Sunday morning, its token ENA was valued at $1.1065. While this figure is below the year-to-date peak of $1.5177, it marks a substantial 277% increase from its lowest point this year. The company's market cap has soared to exceed $1.5 billion.

Ethena's performance largely stems from the rising interest in its stablecoin, USDe, now ranking as the seventh largest coin in the market, boasting assets worth over $2.3 billion despite its recent launch.

Concerns Surrounding USDe Stability

However, the rapid expansion of both USDe and Ethena has led to significant scrutiny, drawing comparisons to the plight of Terra, which faced a collapse in 2022.

Ethena's objective is clear - to provide its investors with tangible returns. Unlike Tether and USD Coin, traditional stablecoins that do not offer direct profits to their holders, USDe manages to provide its 147k holders with an annual APY of 17.2%, surpassing the average returns from high-risk corporate bonds such as the ICE BofA US High Yield Index, boasting a yield of 7.87%.

Echoes of Terra Luna

The potential for USDe holders to outperform the market is plausible as long as the landscape remains favorable. However, the risk lies in the fact that, unlike its counterparts USDT and USDC, USDe is not strictly pegged to the US dollar on a 1:1 basis. Instead, it operates as an algorithmic stablecoin utilizing a tactic called cash and carry, involving asset purchase and derivative shorting.

While this arbitrage strategy has previously been successful, exemplified by thriving ETFs like JEPI and JEPQ, there is inherent risk, as observed during Terra's downfall and ecosystem collapse.

Similarly to USDe, Terra's stablecoin Terra UST once delivered returns exceeding 20%, leading to rapid asset growth. Unfortunately, the scenario transpired into chaos in 2022 when the stablecoin experienced a significant depegging, resulting in staggering losses exceeding $40 billion.

While this does not imply an imminent depegging of USDe, it illustrates the substantial risk associated with such investments, particularly amid the ongoing cryptocurrency market dip. Bitcoin's fall to sub $65,000 and an overall 6% market cap decrease to $2.3 trillion reflect the current volatility in the digital asset space.