Ethena's TVL in USD has fallen by over 50% despite the increasing demand for use.

USDe — the synthetic stablecoin of Ethena, generates yield from the funding rate of the perpetual market — has witnessed a total value locked of (TVL) fall sharply from 14.8 billion USD in October to 7.347 billion USD. This decline of over 50% occurs despite the actual demand for the stablecoin continuing to rise, reflecting the complexities of the yield-generating stablecoin model in DeFi, where leverage can amplify both expansion and contraction cycles.

The TVL of USDe has fallen significantly after the peg loss incident on Binance | Source: DefilLamaUSDe maintains its price by holding spot crypto assets as collateral while also opening short positions in the perpetual market to capture the funding rate differential — a source of yield for holders. The current yield of USDe is about 5.1% per year, a sharp decline from the double-digit levels earlier this year due to the funding rate decreasing amid a weak market and reduced demand for leverage.

Although the TVL has decreased, the use of USDe is still on the rise with over 50 billion USD in on-chain transaction volume last month, indicating that the utility of the token remains intact even as speculative positions are being liquidated.

The main reason for the fall in TVL is the unwinding of the popular “leveraged looping” strategies on many DeFi protocols, especially lending platforms like Aave. With the carry trade model, users deposit sUSDe as collateral, borrow USDC at a high LTV ratio, convert it to sUSDe, and then repeat the process to achieve an effective leverage of over 10 times. When the APY of USDe is higher than the borrowing cost of USDC, this strategy is profitable; however, currently, the yield on USDe has fallen below 5.4%, the borrowing cost of USDC on Aave, causing many investors to start reducing their positions.

The pressure to reduce the leverage of USDe has further increased as some DeFi protocols face difficulties with the sustainability of their stablecoin farming models and are forced to halt these programs or face scrutiny regarding their profit mechanisms. This development shows the sensitivity of yield-generating stablecoins to rapid capital withdrawals, as the very leverage that once drove growth can also lead to a sharp fall in TVL when unwound.

Thạch Sanh