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Fantom Creator Warns of Potential Crypto Meltdown Due to Risky Incentives

Fantom developer Andre Cronje recently voiced apprehensions regarding risk management strategies within a particular DeFi initiative, indirectly alluding to Ethena Labs’ synthetic currency, USDe. Without directly mentioning the platform, Cronje pointed out concerns surrounding funding rates in perpetual futures contracts.

As a prominent figure in the DeFi space, Cronje warned of potential risks tied to incentives associated with the synthetic dollar, drawing parallels to previous market upheavals such as the Terra-Luna incident.

Andre Cronje Sounds Alarm on DeFi Risk Management, Hinting at Synthetic Dollar Protocol

In an April 3 tweet, Cronje challenged the notion that merely closing positions when markets downturn is a reliable risk management strategy, likening it to a meme due to its practical limitations. He cautioned against the dangers of depending on positive funding rates during bullish market conditions, as these rates can swiftly turn negative, resulting in liquidations and potentially leaving assets “unbacked.”

Additionally, Cronje referred to the “law of large numbers” as a possible solution, akin to strategies observed in other protocols such as UST’s $1 billion BTC fund. However, he warned that while these strategies may be effective initially, they could eventually falter, suggesting potential weaknesses in risk management approaches.

His tweet sparked discussions regarding the sustainability of the high yields offered by Ethena’s synthetic dollar, USDe, particularly highlighting concerns that excessive optimism during positive market trends could lead to asset backing issues and liquidations when market sentiment shifts negatively.

The initial launch of Ethena’s synthetic dollar on the public mainnet with a substantial annual percentage yield (APY) garnered significant attention. It raised apprehensions similar to those witnessed during the collapse of Terra UST’s Anchor protocol in the past, underscoring the critical importance of robust risk management practices.

Ethena Builds Synthetic Dollar Using ETH-Based Decentralized Protocol and Crypto Collateral

Ethena Labs’ USDe is a synthetic dollar operating within a decentralized framework built on Ethereum. This stablecoin leverages crypto-native collateral, including staked Ethereum, and employs hedging strategies in derivative markets across centralized and decentralized exchanges. Through this approach, USDe achieves price exposure netting, effectively creating a tokenized dollar.

In an exclusive interview with cryptonews.com, Conor Ryder, Head of Research at Ethena, delved into various aspects of stablecoins and synthetic dollars. Ryder explored the stablecoin trilemma, distinguishing between ‘stablecoins’ and ‘synthetic dollars,’ and underscored the diverse applications of stablecoins.

Ryder initiated the discussion by addressing the stablecoin trilemma, which revolves around balancing stability, decentralization, and scalability concurrently. He highlighted past instances where projects prioritized scalability and decentralization over stability, referencing cases like TERA. Ryder stressed the significance of a robust peg mechanism and adequate collateralization to uphold stability.

In terms of censorship resistance, Ryder discussed centralized stablecoins like USDC and USDT, noting that while they offer stability, their collateral lacks censorship resistance as it is backed by US government bonds. Despite this vulnerability, they remain dominant in the market due to their stability.

Moving on to scalability, Ryder highlighted the challenges faced by DeFi stablecoins in balancing scalability with stability and decentralization. He pointed out that over-collateralization, commonly seen in crypto-backed stablecoins, hampers scalability compared to centralized counterparts.

Regarding Ethena’s approach, Ryder emphasized the use of crypto-native collateral (Stealth) to achieve censorship-resistant backing. He stated:

“To circle back to Ethena, hopefully, we’ve addressed each of those points. We have censorship-resistant collateral, i.e., Stealth, which is crypto-native. In terms of scalability, this is probably the most intricate part. With the derivative position, for every $1 Stealth, you have a $1 short for the perpetual position to hedge it off. This means we only need a one-to-one collateral ratio, making us as scalable as centralized stablecoins.”

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Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

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