Original author: Andre Cronje

Translator: Odaily Azuma

Editors note: Ethena Labs officially opened ENA airdrop applications yesterday. In the past few months, the issuance scale of USDe has grown rapidly with the expectation of potential airdrops and the high yield derived from spot + contract arbitrage. As of the publication of this article, the minting volume of USDe has exceeded 1.8 billion U.S. dollars. In the decentralized stable currency track, it has surpassed the pioneers such as FRAX, crvUSD, and GHO, which are backed by head projects. It is likely to continue to grow and shake the top spot of DAI. .

However, when USDes data is advancing rapidly, many doubts have come to mind in the market. This afternoon, Andre Cronje, the old king in the DeFi field, published a long article on his personal account. Although the article did not explicitly mention Ethena Labs and USDe, it strongly questioned the design of the project from a mechanical level. It is even directly compared to the next UST.

The following is the original content of Andre Cronje, compiled by Odaily.

In the cryptocurrency industry, we see something new all the time.

There are some big things that have happened in the industry that I do wish I had looked at more carefully, but I also admit that some of them took me completely by surprise.

For example, UST, I am very sure that it will fail, because in my opinion its mechanism is illogical, but many people who I think are very smart are opposed to it, and they have been trying to convince me and try to make me Admit that I was wrong; as for FTX, I never thought it would go bankrupt. Whenever someone asked me whether I should withdraw funds from FTX, although I would answer Okay, why take the risk?, but this is just my opinion of all The unified view of the exchange is that its collapse was a complete surprise to me.

The reason why I bring these things up again is just to explain in advance that many times I don’t actually know the truth.

Nonetheless, one thing does catch my attention right now - an emerging DeFi infrastructure is rapidly gaining traction in the market, and I see it has been integrated into some protocols that I have always considered to be very low risk. However, it is my understanding (perhaps wrongly) that the risks of this new agreement are extremely high.

Im not going to point fingers directly, but I do want to ask people who are smarter than me, where is my understanding going wrong? Ive looked at all the available literature, read many outside reviews, and I still cant see how it eliminates risk.

• Odaily Note: In the full text, Andre Cronje did not directly mention Ethena Labs and USDe, but judging from the market conditions and protocol design he described, the targets of his doubts were Ethena Labs and USDe.

Next, lets take a look at the architecture of the above protocol.

The first is the perpetual contract. In normal spot trading, traders are simply purchasing the asset. To describe it more accurately, traders are actually selling (short) one asset and buying (long) another asset. For example, in BTC/USD trading, you are selling (short) USD And buy (go long) BTC, if BTC appreciates relative to USD, you make money. We call this simple trading model spot trading, because you will always own some kind of spot asset. Even if BTC depreciates relative to USD, you will always own BTC assets. Perpetual contracts are a trading tool that allow traders to perform similar operations without involving any spot assets, so it is more like gambling than trading.

The special thing about perpetual contracts is that both buyers (long sellers) and sellers (short sellers) need to pay a funding rate. If the buying demand is significantly greater than the selling demand, the sellers funding rate will be positive. , the buyers funding rate will be negative, thus ensuring that the price of the perpetual contract converges with the spot price. For a trader, to maintain your trading position, all you need to do is provide margin. Margin is essentially collateral to fund the funding rate debt. If the funding rate turns negative, it will Start gradually eating away at your collateral until your position is closed.

Regarding the collateral (margin), another mechanism of the above agreement is the automatic interest-earning function of the collateral, that is, as long as the collateral is held, the asset will continue to increase in value. In the above projects, the so-called automatic interest-bearing collateral is actually stETH. If I hold 1 stETH, it is essentially equivalent to me being long stETH. Then if I open a short position of 1 stETH through the perpetual contract, position, I can theoretically achieve delta neutrality because even if I lose $100 on stETH short, I can still gain $100 on stETH long. Two additional points. First, the only exchange I can find that accepts stETH as margin is ByBit. Second, the Delta Neutral discussion here ignores the funding rate issue.

• Odaily Note: The so-called Delta, in finance, is an indicator used to measure the impact of changes in underlying asset prices on changes in investment portfolios. The value range is -1 to 1. The definition of Delta Neutral is that if a portfolio consists of related financial products and its value is not affected by small price changes in the underlying assets, such a portfolio is Delta Neutral.

Generally speaking, the operating logic of the above protocol is that you can purchase $1,000 of stETH and use it as a deposit to open a short position of $1,000 of stETH, thereby theoretically achieving Delta neutrality and continuing to gain stETHs interest-earning income (about 3%) and bear the capital rate profit and loss.

I am not a professional trader and will only conduct some exploratory transactions to study DeFi. I admit that trading is not my strong point. I tried to compare the above operating logic with what I understand about the basic financial elements (mortgage and debt). According to my experience, any contract position will eventually have two endings, either it will be closed (that is, delta neutral will be broken), or it will have to be liquidated.

Therefore, my current ideal inference on the working mechanism of this protocol is-"When the market turns, the position will be closed, but this statement is like"You just need to sell when BTC goes up and buy when it goes down"It sounds obvious but is almost impossible to implement in practice.

So although everything seems to be going well now, this is just because the market is in a bullish mood, everyone is willing to hold long orders, and the short-selling funding rate is positive, but the situation will eventually change. When the short-selling funding rate turns to With a negative value, the margin (collateral) will begin to be eroded or even liquidated, and then only an asset without any support will be left.

Some people may use"Law of Large Numbers"To refute, this is very similar to when UST claimed to have a protection fund of US$1 billion in BTC——"Its useful until the day its useless.

• Odaily Note: By the so-called law of large numbers, Andre does not seem to be referring to the classic definition of statistics here, but to for short positions, the funding rate is positive in the long run. most of the time argument.

So Im hoping smart people on social media can help answer my questions and point out where Im wrong in my understanding or what key information Im missing.