Fantom Founder Worried About Negative Funding Rates Leading to Unbacked Assets

Andre Cronje, the creator of Fantom, a decentralized finance (DeFi) platform, has expressed concerns about the potential risks associated with Ethena Labs’ USDe stablecoin. Although Cronje did not mention the specific protocol or synthetic dollar by name, he highlighted the issue of funding rates in perpetual futures contracts.

In a post on X on April 3, Cronje warned about the possibility of a future meltdown similar to the Terra-Luna collapse. He explained that while everything may seem positive now, with the market in a good state and shorting funding rates positive, the situation can quickly change. When funding rates turn negative, margin requirements may not be met, leading to the liquidation of assets and the creation of an unbacked asset.

Ethena Labs’ USDe stablecoin yield first raised concerns on February 19 when it launched on the public mainnet with a high annual percentage yield (APY) of 27.6%. This was significantly higher than the failed Terra UST’s 20% APY on the Anchor protocol, which collapsed in May 2022, causing substantial losses.

Responding to these concerns, Guy Young, the founder of Ethena Labs, stated that the skepticism and concerns are signs of a maturing industry emerging from the aftermath of the Terra-Luna collapse. Regarding the issue of negative funding rates, Young downplayed its significance, highlighting that funding rates only turned negative briefly in 2022, which was a challenging year for the crypto market. He also mentioned that Ethena Labs has implemented measures such as an emergency insurance fund and arbitrage mechanics to mitigate the risk.

Young compared Ethena Labs’ USDe yield to Anchor protocol’s yield, stating that the latter was artificially inflated and unsustainable. He emphasized that USDe’s yield is publicly verifiable and generated through staking returns and shorting Ether perpetual futures contracts. This dynamic yield, according to Young, is more sustainable and transparent compared to Anchor’s misleading promises of “risk-free” returns.

Jae Sik Choi, an analyst at Greythorn Asset Management, supported Young’s argument, stating that Anchor protocol’s yield was lower than what it paid out. Choi emphasized that USDe’s yield is clearly stipulated and derived from perpetual futures and stETH.

Cronje’s concerns about Ethena Labs’ USDe stablecoin revolve around the potential risks associated with funding rates in perpetual futures contracts. Young, Believes that the measures implemented by Ethena Labs mitigate these risks and that USDe’s yield is transparent and sustainable compared to Anchor protocol’s misleading practices.

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