Ethena, the protocol behind the USDe “synthetic dollar,” is encountering significant headwinds as negative funding rates have reduced the returns that once fueled USDEe’s rapid growth.
The protocol behind USDe, a synthetic dollar, is facing challenges due to negative funding rates, which have reduced the returns that fueled USDe's rapid growth earlier this year.
Since July 1, the USDe supply has shrunk by over $500 million and now stands at $3.09 billion.
For comparison, over the same time period, the total stablecoin market cap has grown from $161 billion to $167.4 billion.
Earlier this year, USDe attracted attention by offering yields between 20% and 30%, spiking to as high as 120% at one point.
This led to an unprecedented rate of growth, concluding in a peak supply of $3.61 billion in early July.
However, the situation has changed dramatically since then.
Funding rates, which are periodic payments made between traders based on the difference between the spot price of an asset (like bitcoin) and its price in the futures market, have turned sharply negative.
On major exchanges such as Binance, these rates have reached the lowest levels of the year at -15% annually for Bitcoin, as per Galaxy’s Kelly Greer.
For USDe, this is relevant because the Ethena protocol relies on short positions in bitcoin and other assets, such as ETH and SOL, to hedge against price fluctuations.
Negative funding rates mean Ethena must pay rather than receive these periodic payments, severely impacting its yield.
This downturn has significantly reduced Ethena’s ability to offer competitive yields, stalling both growth and adoption.
The annual percentage yield (APY) that once attracted many to stake USDe has now plummeted to 4% and was even 0% in recent days, according to Ethena’s dashboard.
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