Ethena: A crypto-native synthetic dollar stablecoin

Ethena is a structured passive income product that lies between centralized and decentralized structures. It securely holds assets on-chain, maintains stability through a delta-neutral strategy, and generates returns for users.

Background

In the current stablecoin market, centralized stablecoins like USDT and USDC dominate, while the collateral for the decentralized stablecoin DAI is tending towards centralization, and algorithmic stablecoins like LUNA and UST have collapsed after rapid growth. The emergence of Ethena attempts to seek a balance between DeFi and CeFi.

Main Features

1. Use OES( off-exchange settlement) services, combining on-chain asset custody with exchange margin, retaining the respective advantages of DeFi and CeFi.

2. The underlying sources of income include Ethereum staking yields and the funding fee income from exchange hedge positions.

3. Incentivizing liquidity through a points system.

Ecological Assets

• USDe: stablecoin, minted by depositing stETH
• sUSDe: Certificate tokens obtained by staking USDe
• ENA: Governance token of the protocol, can be exchanged for points.

Minting and Redeeming USDe

Users can deposit stETH to mint USDe at a 1:1 ratio. stETH is sent to a third-party custodian and mapped to the exchange. Ethena then opens a short perpetual position for ETH on the exchange to maintain the stability of the collateral value.

Ordinary users can obtain USDe from external liquidity pools, while whitelisted institutions can directly mint and redeem through contracts. Assets are always retained in the on-chain custody address, unaffected by exchange risks.

OES Custody Mode

OES combines on-chain transparency with the fund utilization of centralized exchanges. It utilizes MPC technology to construct custodial addresses, co-managed by users and custodians, reducing counterparty risk. At the same time, OES providers collaborate with exchanges, allowing asset balances to be mapped to the exchange for trading.

Profit Methods

1. Staking earnings generated by ETH staking derivatives
2. The funding rates for short positions obtained from the exchange and the basis trading profits.

Yield Rate Analysis

Recently, the annualized yield of the agreements reached as high as 35%, with the yield allocated to sUSDe reaching 62%. However, with the market cooling down, the yield has decreased. The yield of USDe depends on the situation of the exchange's futures market and is limited by the market size.

Scalability

The expansion of USDe is mainly limited by the open interest of the ETH perpetual market (Open Interest). Currently, the open interest for ETH and BTC is approximately 12 billion and 30 billion USD, respectively. The market capitalization of USDe has reached 2.3 billion USD, ranking fifth among stablecoins.

The challenges facing future expansion include:

• Need to increase corresponding short positions in the existing market
• Over-issuance may lead to a decrease in funding rates
• Need to seek a balance between expansion and yield.

Risk Analysis

1. Funding rate risk: When there is insufficient bullishness in the market, negative returns may be faced.
2. Custody risk: Reliance on OES and centralized institution services
3. Liquidity risk: There may be insufficient liquidity when making large position adjustments.
4. Asset Anchor Risk: The decoupling of stETH and ETH may trigger liquidation.

To mitigate risks, Ethena has set up an insurance fund that allocates funds regularly from protocol revenue.

Overall, USDe may become a high-yield, short-term limited-scale, long-term market-following stablecoin product.