Original Title: "USDe Issuance Scale Plummets by $6.5 Billion, but Ethena Faces Even Greater Issues"

Original Author: Azuma, Odaily Planet Daily

Ethena is experiencing the largest outflow of funds since its inception.

On-chain data shows that the circulating supply of Ethena's main stablecoin product, USDe, has fallen to 8.395 billion, down approximately $6.5 billion from its peak of nearly $14.8 billion in early October. While it cannot be said to have "halved," the drop is significant enough.

This comes at a time when DeFi security incidents are frequent, especially with two yield-bearing stablecoins, Stream Finance (xUSD) and Stable Labs (USDX), which claim to use a similar Delta neutral model as Ethena, experiencing consecutive failures. There are rumors that the trigger for these failures may have been the breaking of the neutral balance due to the forced liquidation by CEX's ADL during the market crash on October 11. Coupled with the deep-seated memory of USDe briefly deviating from its pegged price on Binance at that time, there has been a surge of FUD surrounding Ethena.

Is USDe Still Safe?

Considering Ethena's current market scale, if any unexpected events occur, it could potentially brew a black swan event comparable to Terra back in the day… So, has Ethena encountered problems? Is the outflow of funds really a result of risk aversion? Can we still confidently deploy funds into USDe and its derivative strategies?

To cut to the chase, I personally tend to believe: Ethena's current strategy is still operating normally; while the risk aversion sentiment surrounding DeFi has exacerbated Ethena's fund outflow to some extent, it is not the main cause; the current safety status of USDe remains relatively stable, but it is advisable to avoid circular loans as much as possible.

The reasons for my acknowledgment of Ethena's current operational status are mainly twofold.

Firstly, unlike most yield-bearing stablecoins that do not clearly disclose their position structure, leverage multiples, hedging exchanges, or liquidation risk parameters, Ethena can be considered a benchmark in terms of transparency. You can clearly see reserve information and proofs, position distribution and proportions, implementation of yield status, and other factors directly on Ethena's official website.

The second point is the issue mentioned earlier regarding ADL causing an imbalance in neutral strategies. It is rumored that Ethena has signed ADL exemption agreements with some exchanges, but this has never been confirmed, so we will set it aside for now. However, even without exemption clauses, Ethena is relatively less affected by ADL. This is because, from its public strategy, it can be seen that Ethena primarily chooses BTC, ETH, and SOL as hedging assets (with BNB, HYPE, and XRP having very small proportions). These three major assets experienced relatively small fluctuations during the massive drop on October 11, and the counterparty's capacity to bear risk is greater. In contrast, ADL is more likely to occur in the altcoin market, where fluctuations are larger and counterparties have less capacity to bear risk. Therefore, the protocols that are currently failing are often those that lack transparency (possibly due to overly aggressive strategies that are not neutral at all).

As for the main reasons for Ethena's fund outflow, they can also be attributed to two points. First, as market sentiment has cooled (especially after October 11), the arbitrage space between the futures and spot markets has narrowed, leading to a decrease in protocol yields and the annualized yield of sUSDe (which has dropped to 4.64% as of the time of writing), making it less competitive compared to the base rates of mainstream lending markets like Aave and Spark. Consequently, some funds have chosen other yield paths; second, the price fluctuations of USDe on Binance on October 11 heightened market awareness of the risks associated with circular loans. Coupled with the decline in yields on both off-chain (CEX reducing subsidy intensity) and on-chain ends, a large amount of capital has exited circular loans and withdrawn funds.

Based on the above logic, we believe that Ethena and USDe are still maintaining a relatively stable operational state. Although this round of fund outflow has exceeded expectations to some extent due to extreme market conditions and security incidents, the main cause can still be attributed to the reduced attractiveness due to the narrowing arbitrage space in a cold market sentiment, which is precisely determined by Ethena's design logic—affected by market environment fluctuations, the protocol's yield and capital attractiveness will also fluctuate in tandem.

A More Severe Test: Scalability

Compared to the periodic outflow of funds, a more severe issue facing Ethena is that its Delta neutral model, which relies on the perpetual contract market for survival, seems to have hit a bottleneck in terms of scalability.

On November 6, DeFi mogul Mindao commented on the recent failures of neutral strategy stablecoins, stating: "The long-term returns of such strategies will converge to treasury levels (or even lower), with liquidity constrained by exchange OI, and counterparty risk all in the black box of CEX. This model has been completely falsified… They cannot scale, ultimately becoming niche financial products, and cannot compete with fiat-backed stablecoins."

This is akin to "The Truman Show," where Ethena once thrived in a limited small world, but this small world is constrained by the position scale of the perpetual contract market and the liquidity and infrastructure conditions of trading platforms. In contrast, USDT and USDC, which Ethena aspires to challenge, exist in an unrestricted larger world. This inherent difference in growth environments may be Ethena's greatest challenge.

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