By
Chimamanda U. Martha
April 25th, 2024
Arthur Hayes believes that USDT and USDe have risks, and both could ultimately fail. However, the failure could be linked to different reasons, given Ethena’s superior approach.
The dominance of Tether (USDT), the global leader in stablecoin by market cap, could be under threat, according to Arthur Hayes, co-founder and former CEO of BitMEX crypto exchange. Hayes believes that Ethena, a new entrant in the “stablecoin” sector with its USDe token, can outpace Tether because of its innovative design and transparency.
Sharing Ethena insights on his latest newsletter edition dubbed “Dust on Crux Part Deux”, Hayes examined Tether’s weaknesses and how Ethena aims to solve them.
He pointed out Tether’s heavy reliance on banks for its existence, stating that one can not create, custody, or redeem USDT without a traditional bank account. Besides, Tether holds a huge US Treasury allocation, making it vulnerable to partner banks’ demands and regulatory pressure.
Additionally, Tether provides no loans or interests to depositions since it is a ‘fully reserved bank’. That’s where Ethena comes in.
Ethena (USDe) Opportunities
Ethena is a synthetic dollar-backed stablecoin. It uses a different approach from Tether and doesn’t hold actual dollars in reserve. Instead, its USDe maintains its value through staked Ether (ETH) and corresponding short futures positions, especially Short ETH/USD Perpetual Swaps.
Hayes noted that the above mechanism makes Ethena strive for more decentralization, unlike Tether. Additionally, it adopts a community-driven method of managing the protocol.
Moreover, Ethena’s operations can be quickly audited and verified on-chain, unlike Tether’s opaque nature. Besides more stability and a decentralized future, USDe provides a high native yield to users.
Hayes believes that USDe’s higher yields could attract more users from Tether. For perspective, Ethena’s $820M assets generated a 67% yield this week. Hayes’s calculations showed that Ethena could hit around $300M in annual revenue.
Ethena (USDe) Risks
But Ethena has also faced its share of controversies shed light on its potential risks. Since crypto assets collateralize USDe, market watchers have quickly termed it the next “Terra Luna”.
However, other observers termed the FUD (fear, uncertainty, and disinformation) overblown, noting that USDe was fully collateralized and generated yield through basis trading.
For Hayes, Ethena’s model also comes with inherent risks. One of them is the exchange counterparty since it holds short perp swap positions on derivative centralized exchanges (CEX). Like Tether’s risk exposure to banks, Ethena’s is exposed to CEXs.
Additionally, smart contract vulnerabilities, negative funding on CEXs, and slashing risks threaten Ethena’s model. For perspective, slashing risk occurs when an Ethereum node validator violates specific rules, leading to slashing of their staked Ether (ETH).
Fortunately, Ethena has an Insurance Fund that covers all these risks. Hayes believes that the insurance fund is a good approach. As such, he maintained that USDT and USDe have risks, and both could ultimately fail. However, the failure could be linked to different reasons, given Ethena’s superior approach.