Two years after blowing up his own fund, Zhu Su offers advice to $2B Ethena

Almost two years after its spectacular blow-up, Three Arrows Capital (3AC) co-founder Zhu Su has helpfully offered advice to Ethena on how to manage risk.

Su’s fund blew up spectacularly in 2022 after aggressively pursuing his ‘supercycle’ thesis. 3AC ghosted creditors and was uncooperative with liquidators, leading to Su’s imprisonment in September after attempting to flee Singapore.

Su’s partner in crime Kyle Davies remains unrepentant and intends to avoid jail.

Boldly presuming Ethena’s risk managers would want his advice in the first place, Su suggests leveraging up the long side of the trade to keep the ETH ‘funding rate’ high. Rather than simply holding USDe’s staked ETH collateral, he advises using it to borrow more ETH on decentralized finance (DeFi) protocol Aave.

The extra funds would then be used to buy perpetual swaps, boosting the demand for leverage and keeping USDe yields up.

Read more: Ethena offers 27% on stablecoins but where is the yield coming from?

Ethena’s position is what’s known as a basis trade, taking advantage of the current demand for ETH leverage across the industry.

The protocol accepts deposits in a variety of stablecoins which it uses to buy staked ETH. This long position is hedged by shorting ETH on exchanges which, given market sentiment, currently earns a ‘funding rate.’ The same model has recently been added for backing USDe with Bitcoin.

Earning yields on both sides of a hedged position allows Ethena to earn a high combined return for its users, for now at least. Ethena has racked up over $2B in deposits since launching in February spurred on by the promise of high returns and points (or ‘shards’) campaign.

Much of the worry over Ethena’s model has been over the stability of such a large position if funding rates were to turn negative, as they briefly did during last weekend’s market instability.

If the funding rates on the short side of the trade were to drop far enough, they’d cancel out the staking rewards earned from the long side. This would erode USDe’s backing and, depending on the timeframe, could lead to a depeg of the ‘synthetic dollar’.

The risk, detailed in Ethena’s docs, is well known, however, there are still concerns over how rapidly USDe has expanded and the potential danger posed by a sudden need to rapidly unwind positions.

Comparisons have been drawn between Ethena’s USDe and Do Kwon’s collapsed algorithmic stablecoin UST, which also offered outsized ‘stable’ yields via the Anchor protocol.

3AC’s implosion came in the wake of the market crash precipitated by UST’s dramatic depeg almost two years ago.

Read more: OPNX is ‘dead’ but Zhu and Davies aren’t quite finished

Since then, Su and Davies (somewhat ironically) launched a bankruptcy claims trading platform, OPNX. The already-defunct exchange’s own token is down 85% from its all-time high in August last year.

It has not all been bad news for Su, though, who described his jail time as “a really enjoyable experience overall.”

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