The Rise of the Native Encryption Synthetic Dollar Stablecoin USDe

USDe is an innovative native synthetic dollar stablecoin that seeks to balance between centralization and decentralization. This product secures assets on-chain and maintains stability through a delta-neutral strategy while providing users with passive income.

The background of the birth of USDe is that the stablecoin market has been dominated by centralized stablecoins for a long time, the collateral of decentralized stablecoins DAI tends to be centralized, and algorithmic stablecoins LUNA and UST have collapsed after rapid growth. USDe tries to find a balance between DeFi and CeFi.

USDe combines on-chain custody with exchange mapping. User assets are safeguarded by on-chain custody services provided by institutions, while funds are mapped to centralized exchanges for margin provision. This approach retains the asset isolation characteristics of DeFi while obtaining sufficient liquidity from CeFi.

The underlying yield of USDe comes from two aspects: first, the Staking yield from Ethereum staking derivatives, and second, the funding fee yield obtained by opening hedging positions on exchanges. This is seen as a structured universal funding rate arbitrage product.

The USD ecosystem includes three main assets:

• USDe: stablecoin, minted by depositing stETH
• sUSDe: The certificate token obtained after staking USDe
• ENA: Protocol governance token, which can be obtained through points exchange.

Minting and Redemption of USDe

Users can mint USDe at a 1:1 USD ratio by depositing stETH into the Ethena protocol. The deposited stETH will be sent to a third-party custodian and mapped to the exchange account. Ethena then opens a short perpetual contract for ETH on the exchange to ensure that the collateral value remains delta neutral.

Ordinary users can obtain USDe in external liquidity pools. Institutions approved through KYC/KYB can directly mint and redeem USDe through the Ethena contract.

Assets are always kept on a transparent chain custody address, without relying on traditional banking infrastructure, reducing the risks of fund misappropriation and exchange bankruptcy.

OES - Innovative Fund Custody Method

OES( Off-exchange Settlement ) is a custodial settlement method that balances on-chain transparency with the use of funds in centralized exchanges. It utilizes MPC technology to construct custodial addresses, which are jointly managed by users and custodians, maximizing users' control over their assets.

OES providers collaborate with exchanges, allowing traders to map their asset balances to the exchange to complete trading and financial services. This enables Ethena to custody funds outside of the exchange while using those funds as collateral for Delta hedging on the exchange.

Profit Model

The profit of USDe mainly comes from two aspects:

1. Ethereum staking rewards brought by ETH liquidity derivatives

2. The funding rate income from opening short positions on the exchange and the basis trading income.

The funding rate is the amount paid periodically to long and short positions based on the price difference between the spot and perpetual contract markets. The basis refers to the deviation between spot and futures prices, and it tends to converge to 0 as the futures contract approaches expiration.

Ethena utilizes the mapped fund balances at exchanges to develop different strategies for arbitrage, providing diversified returns for USDe holders.

Yield and Sustainability

The yield of USDe once reached a high level, with the recent protocol annualized yield up to 35%, and the yield of sUSDe reaching 62%. This high yield is partly due to USDe not being fully staked as sUSDe, allowing sUSDe to obtain a more concentrated distribution of earnings.

However, as the market cools down, the long funds of exchanges decrease, the funding rate income declines, and the current protocol yield drops to 2%, while the sUSD yield falls to 4%.

The yield of USDe largely depends on the futures market situation of centralized exchanges, constrained by the scale of the futures market. When the issuance of USDe exceeds the capacity of the corresponding futures market, it will limit its continued expansion.

Scalability Analysis

The scalability of USDe is mainly limited by the total value of open interest in the ETH perpetual market ( Open Interest ). Currently, the ETH Open Interest is approximately 12 billion USD, and the BTC Open Interest is about 30 billion USD. The current issuance of USDe is around 2.3 billion USD.

Compared to other stablecoins that require over-collateralization, the scalability of USDe relies more on the size of the perpetual market. This is also the reason why Ethena chooses to collaborate with centralized exchanges to gain greater liquidity and market depth.

The market cap growth of USDe is influenced by various factors, including natural growth of market users and fluctuations in cryptocurrency prices. However, its scalability is closely related to the size of the perpetual market.

Risk Analysis

1. Funding rate risk: When there is insufficient market bullishness or excessive issuance of USDe, there may be a risk of negative funding rate returns.

2. Custody Risk: Fund custody relies on OES and centralized institutions, which poses potential risks of fund acquisition delays or theft.

3. Liquidity risk: Large amounts of funds may face liquidity shortages at specific moments.

4. Asset anchoring risk: The anchoring of stETH and ETH may experience temporary decoupling, leading to liquidation risk.

In order to address these risks, Ethena has established an insurance fund, which is funded by a portion of the protocol's revenue distribution.

Overall, USDe, as an innovative stablecoin solution, seeks a balance between yield and risk. Its future development will depend on the market environment, risk management capabilities, and the depth of cooperation with traditional financial institutions.