Ethena - A New Way to Implement Decentralized Stablecoins

Ethena Labs is a decentralized stablecoin protocol built on Ethereum that will provide a crypto-native solution for money not reliant on traditional banking system infrastructure, alongside a globally accessible and permissionless dollar denominated savings instrument - the 'Internet Bond'.

Ethena has three products: USDe, Internet Bonds, and Repo Financing.

• USDe: USDe achieves stability by hedging Ethereum collateral with Delta hedging and maintaining stability through Delta-neutral hedging with stETH on both CEX and DEX. It offers the first anti-censorship, scalable, and stable native

  cryptocurrency

  solution. Additionally, tokens like stETH, which can generate yield on their own, can also serve as hedging assets for USDe, providing an additional layer of stability. Users can deposit USD, ETH, or stETH as collateral to create USDe.

• Internet Bonds: Internet Bonds are global, floating, and fixed-rate USD-denominated bonds built on USDe. They provide fixed income to bondholders, converted from the baseline yield of stETH and the futures market, enabling the first globally accessible and permissionless cryptographic reserve instrument. Users can create various fixed and floating-rate bond exposures using expiring futures or perpetual contracts, forming a cryptocurrency yield curve.

• Repo Financing: Ethena also offers a repurchase agreement feature where users can earn a certain rate of return by providing liquidity on the Repo product. Additionally, it allows users to enhance yield and enable cross-DeFi composability leverage on the stETH and USDe collateral markets.

USDe Creation Process

USDe is created via a variety of delta-neutral derivative positions against liquid staked Ethereum collateral across both centralized and decentralized venues.

Delta neutral means that a portfolio of related financial products is constructed in such a way that its value is not significantly affected by small price movements in the underlying asset. This portfolio typically includes options and the corresponding underlying assets, allowing for positive and negative delta hedging to offset each other, thus ensuring that the portfolio's price is less sensitive to changes in the underlying asset's price. This is a key mechanism that enables Ethena to achieve a 1:1 stablecoin peg.

Industry Background

• Cryptocurrencies need censorship-resistant and reserve-backed stablecoins: For any functional and truly decentralized financial system to operate at scale, the trading capital and core financing collateral need stable assets that are not dependent on traditional banking infrastructure. Without censorship-resistant and stable reserve assets, both centralized order books and decentralized applications are inherently vulnerable.

• Users outside the United States cannot access “risk-free” returns in USD: Existing stablecoins have the feature of “no return risk,” and the demand for existing stablecoins has been proven to be massive, exceeding $130 billion. Ethena aims to provide an equivalent product of savings with no need for permission, presenting the largest market opportunity that cryptocurrencies can offer to individuals worldwide.

• The current stablecoin landscape: Major trading pairs in the crypto market are denominated in stablecoins, covering spot and futures markets on both centralized and decentralized platforms. Approximately 70% of trading pairs and volumes often surpass BTC and ETH. Stablecoins form the foundation of the entire industry due to their large user base, significant market potential, and revenue generation capabilities.

Financing

Ethena has recently raised $6.5 million in seed funding, with Dragonfly leading the investment round. It has also received support from various trading platforms such as Deribit, Bybit, OKX, Gemini, and Huobi, as well as BitMEX founder Arthur Hayes and his family office.

It's worth noting that Ethena seems to be one of the most supported projects by exchanges in its seed round. Currently, the project is in its very early stages, with no whitepaper or dapp available yet.

Summary

Compared to other stablecoins, USDe possesses the characteristics of censorship resistance, scalability, stability, and independence from the traditional banking system. In contrast to MakerDAO, Ethena generates stablecoins through delta-neutral derivative positions, resulting in higher capital efficiency. Additionally, Ethena supports LST as collateral, returning the yield rights to users.