DeFi Platform Earning Yield by Shorting Ether Attracts $300M

CORRECTION (Feb. 20, 10:46 UTC): Corrects headline and first paragraph to say inflows from the first few weeks, not the first day.

Decentralized finance platform Ethena has attracted massive inflows since going live amid some criticism around the model it uses to generate an annualized 27% yield to holders of its USDe tokens. It had operated as a beta platform so far, available only to a closed group.

More than $287 million of USDe had been minted as of Tuesday morning, with over $50 million of that coming after the platform went live to the public on Monday. The 27% reward is calculated on a seven-day rolling basis and may change each week based on underlying factors.

Users can deposit stablecoins such as tether (USDT), frax (FRAX), dai (DAI), Curve USD (crvUSD) and mkUSD to receive Ethena’s USDe, which can then be staked. Unstaking takes seven days. The staked USDe tokens can be supplied to other DeFi platforms to earn an additional yield.

Ethena calls USDe a synthetic dollar, which largely mimics an algorithmic stablecoin: The tokens have a target peg of $1 that is minted as ether (ETH) tokens are deposited to the platform.

The yield is generated from two sources:

1. Staking ether to a validator and earning 5% on the capital.

2. Shorting ether futures to capture the funding rate, which is estimated to be above 20% as of historical modeling.

This futures mechanism is similar to a “cash and carry" trade, in which a trader takes a long position in an asset while concurrently selling the underlying derivative. Such a trade, in theory, is directionally neutral and earns money from funding payouts instead of the underlying asset’s price movement.

While the flows have been significant, some parts of the crypto community say the concept has been tested – and failed to catch on – previously.

“There's been 2 projects that tried this before and both gave up because they lost money due to yields inverting,” said @0xngmi, a co-founder at DeFillama in an X post. “When yields invert you start losing money, and the bigger the stablecoin is the more money it loses.”

Others say the concept could face tests around how its risk is managed.

“While new stablecoin experiments are welcome, there are several parts to Ethena that will likely be challenged, especially regarding its risk management,” Doo Wan Nam, founder of governance research firm Stable Lab, said in a Telegram chat.

Ethena’s head of research, Conor Ryder, addressed some of these concerns in an X post on Monday, stating the protocol had gone live with its parameters based on historical testing that did not present far-fetched risks.

Ryder said that because demand for going long on ether is currently high, the futures rates for shorting the cryptocurrency are expected to remain high.

“There is a clear demand in crypto to go long with leverage. Deep pools of capital are unwilling to lend the capital on the short side of that long leverage,” he said. “Negative funding rates are a feature, rather than a bug of the system. USDe has been built with negative funding in mind.

Ethena’s models have determined that $20 million per $1 billion of USDe would help survive “almost all bearish forecasts of funding rates, Ryder said, and the majority of Ethena’s $14 million funding round will be allocated toward an initial insurance fund of $20 million.