Stablecoins—more like “tokenized funds”?

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Recently, cryptocurrency sell-offs have revealed its less stable side.

Bloomberg columnist Lionel Laurent pointed out in an article on Thursday that stablecoins are supposed to remain stable and be backed by real assets, but not all stablecoins have been tested by severe market downturns, with some exposing vulnerabilities under stress tests.

During last Friday’s tariff-driven cryptocurrency sell-off, the world’s third-largest stablecoin, USDe, briefly lost its peg to the dollar, dropping as low as 65 cents on Binance. This unusual volatility has led to scrutiny of USDe’s underlying mechanisms and exposed the instability of so-called "digital dollars" in extreme market conditions.

Laurent believes that if Circle and Tether are akin to tokenized money market funds, then USDe is more like a tokenized hedge fund. It earns profits by staking Ethereum or hedging crypto derivatives, and S&P Global Ratings has rated its ability to maintain the peg as "weak".

This episode reminds the market that, as regulators face huge pressure to catch up with the future of money, calls for caution regarding stablecoins deserve greater attention.

De-pegging Events Amid Market Panic

In last Friday’s cryptocurrency sell-off, leverage positions worth $1.9 billion were liquidated, with volatile altcoins plunging to nearly zero amid a cash squeeze.

During this turmoil, USDe on Binance dropped to a low of 65 cents. Although the market has since calmed, this was clearly not the performance investors expected of so-called digital dollars.

This de-pegging phenomenon seemed to occur only on the Binance platform and has sparked considerable debate—was it the stablecoin itself that was unstable, or was there an anomaly with the exchange?

As the largest cryptocurrency exchange, Binance has acknowledged a series of problems on its platform involving trades of multiple tokens, including USDe, and has paid out about $283 million in compensation to affected users.

Crypto-Native Hedge Fund Model

Laurent notes that USDe’s underlying mechanism is also under examination. If Circle and Tether are like tokenized money market funds reinvesting dollars into assets like treasuries, then USDe is more like a tokenized hedge fund. It makes money by staking Ethereum or hedging crypto-native derivatives such as perpetual futures.

Perpetual futures are instruments unregulated in the US, allowing traders to speculate with leverage 24/7 and with no expiry. USDe claims these hedges keep the USD value of backing assets "relatively stable" under most market conditions.

According to Jonathan Bier, CEO of Farside Investors, such trading has been highly profitable—demand for leveraged long crypto positions on trading platforms has consistently outstripped supply, and USDe’s market cap has swelled to $14 billion. Last year, USDe’s yield exceeded 20%; last month, Binance offered users holding USDe an annualized yield of 12%.

Weak Pegging Capability

S&P Global Ratings wrote in its assessment of USDe earlier this year that "so far, so good," but warned that the token relies heavily on a functioning crypto exchange ecosystem and has yet to be properly battle-tested; the agency rated its ability to maintain its peg as "weak".

As is often the case in crypto, this massive sell-off revealed that concerns over what might happen under abnormal market conditions are well-founded. Though USDe’s parent company, Ethena, insists that minting and redeeming the token functioned normally during the crash, sell pressure, forced liquidations of traders’ positions, and reliance on Binance’s infrastructure combined to amplify the shockwave. OkX founder Star Xu said on Twitter, "Treating USDe as a simple 1:1 stable asset may bring systemic risk to the entire crypto industry in the future."

Laurent emphasizes that this is not to deny the value of stablecoins or to claim any market is risk-free, even in traditional finance. Although this crypto volatility caused pain, USDe is still a long way from the kind of opaque and fragile stablecoin crash seen with Terra and Luna in 2022.

But perhaps the fact that even crypto professionals were surprised by the intensity of the sell-off should give more weight to warnings advocating caution on stablecoins. As regulators face enormous pressure to catch up with the future of money, and the US is considering introducing domestic perpetual contracts, hopefully the next crash will not expose more tokenized hedge funds.

Risk Warning and DisclaimerMarkets have risks, investment must be cautious. This article does not constitute personal investment advice and does not consider any particular user's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views or conclusions in this article suit their particular situation. Invest accordingly at your own risk. ```