USDe stablecoin earns 9% annually! How does the Ethena protocol challenge the dominance of USDT?

The USDe stablecoin launched by Ethena has risen to become the third largest by market capitalization globally, only behind USDT and USDC, with a total market value surpassing 9.3 billion USD. Unlike traditional stablecoins, USDe uses on-chain assets as reserves and maintains a 1:1 peg to the US dollar through a Delta neutral hedging strategy, while also offering annualized staking yields of up to 9% for sUSDe.

What is Ethena? An Innovative Design of the Synthetic Dollar Protocol

Ethena is a Synthetic US Dollar Protocol, aiming to create a dollar alternative in the crypto world that does not rely on traditional banks. The USDe stablecoin it issues (shown as USDE on some exchanges) operates under a completely different model than USDT and USDC.

Traditional stablecoins like USDT and USDC rely on off-chain fiat currency reserves for their issuance mechanism: for every stablecoin issued, 1 dollar or an equivalent asset must be deposited in a bank account. Although this model is simple and straightforward, it is highly dependent on the traditional financial system, presenting centralized risks such as bank failures, fund freezes, and regulatory interventions.

Ethena belongs to the CeDeFi protocol (a hybrid model of centralized + decentralized finance), with its core innovation being: the reserve assets of USDe are all on-chain cryptocurrencies, including BTC, ETH, USDT, USDC, etc., without the need to hold fiat currency. Through Delta neutral hedging financial engineering, Ethena transforms highly volatile crypto assets into value-stable dollar equivalents while generating continuous returns.

Core Differences Between USDe and Traditional Stablecoins

As of August 2025, the market capitalization of USDe is approximately 9.3 billion USD, making it the third largest USD stablecoin globally. More noteworthy is that Ethena publishes weekly reserve proofs issued by independent audit agencies, with the latest data showing a reserve ratio as high as 100.66%, ensuring over-collateralization for solvency.

Delta Neutral Strategy: The Financial Magic that Stabilizes Volatile Assets

How can USDe maintain a 1:1 peg to the US dollar while using highly volatile assets like BTC and ETH as reserves? The answer lies in the Delta Neutral Hedging strategy.

The operational logic of this mechanism is:

Long Spot: Hold on-chain assets that generate income, such as staked ETH (ETH LSTs). Short Futures: Establish an equivalent short position in the perpetual contract market, such as shorting an equal amount of ETH simultaneously.

This "one long one short" configuration keeps the overall price volatility risk close to zero. When ETH spot rises by 10%, the perpetual contract short incurs a loss of 10%, offsetting each other and maintaining the total asset value stable. Even if BTC surges from 60,000 USD to 100,000 USD, or plummets to 30,000 USD, the net value of USDe remains stable around 1 USD.

More cleverly, this hedging structure can also generate additional收益. The perpetual contract market has a "funding rate" mechanism, where most of the time, long positions need to pay fees to short positions (because demand for long positions is strong in a bull market). By holding short positions, Ethena can continuously collect this funding rate, creating a stable cash flow.

Dynamic Adjustment Mechanism to Respond to Market Changes

Ethena does not rigidly execute a single strategy, but actively adjusts asset allocation based on market conditions:

Bear Market Strategy (Low Capital Fee Rate Period):

Increase the proportion of stablecoins (USDC, USDtb)

Reduce exposure to perpetual contracts

Priority to ensure liquidity and principal safety

Bull Market Strategy (High Funding Rate Period):

Increase derivative position allocation

Reduce stablecoin ratio

Use leverage to amplify returns.

According to the audit report dated September 2, 2025, the distribution of USDe reserve assets is as follows: stablecoins 55%, BTC 31%, ETH and ETH LSTs 14%, SOL 0.5%. This diversified allocation significantly enhances system stability and scalability compared to the earlier model that relied solely on ETH.

Assets are separately custodied in multiple CEX exchanges, reducing single-point risk through geographical and platform diversification.

sUSDe Source of Earnings: Three Pillars Generate Annual Return of 9%

USDe itself does not generate returns and must be staked and converted into sUSDe (yield-bearing token) to have profit potential. As of the time of writing, the annual percentage yield (APY) for sUSDe is 9.14%, with a 30-day average of 7.58%, which is significantly higher than the interest rate on short-term U.S. Treasury bonds.

This income comes from three main sources:

1. Delta Hedging Profit (accounting for about 92% of total profit)

The funding rate received from short positions in perpetual contracts, as well as arbitrage between spot and futures price differences. According to historical data, the annualized return for BTC positions from 2021 to 2024 is approximately 2-11%, while for ETH positions it is around 0-15%. During bull markets, the funding rates are particularly generous, potentially exceeding an annualized rate of 15%.

2. Stablecoin Earnings (accounting for about 7% of total earnings)

Earn interest on stablecoins such as USDtb, USDT, and USDC generated on specific platforms. For example, the loyalty program of the largest cryptocurrency exchange in the United States offers yields for large USDC deposits.

3. ETH Staking Rewards (accounting for approximately 6% of total earnings)

Consensus layer inflation rewards from ETH LSTs, execution layer transaction fees, and MEV (Miner Extractable Value). All earnings are paid in ETH and accumulate automatically through compound interest.

This diversified income structure makes sUSDe regarded as the "dollar bond of the crypto world"—maintaining the low volatility characteristics of stablecoins while providing fixed income similar to bonds. For non-U.S. residents who cannot easily access U.S. dollar savings accounts, sUSDe offers a globally available, KYC-free dollar yield tool.

ENA Token and Ecological Value

ENA is the native governance token of Ethena, but its functions far exceed traditional governance rights:

Governance Function: Holders can vote to decide major decisions of the protocol, such as whether to include SOL in reserve assets, reserve fund RWA allocations, etc.

Staking Rewards: After staking ENA as sENA, you can receive Ethena ecosystem airdrops, protocol revenue sharing, and 15% of the future token supply of the upcoming Ethereal DEX.

Security Assurance: By re-staking ENA (Restaked ENA), it provides economic security assurance for cross-chain message transmission, reducing the attack risk when USDe is transferred between different blockchains.

Ethereal is the decentralized perpetual contract exchange that will be launched in the Ethena ecosystem, using USDe and sUSDe as the main settlement and collateral assets. This "token - stablecoin - exchange" closed-loop design is similar to the role of BNB in its ecosystem, creating continuous value capture for ENA holders.

Risk Warning and Investment Advice

Although Ethena is elegantly designed, it is not without risks:

Funding Rate Risk: In a bear market, the funding rate may turn negative, and shorts need to pay fees to longs, which can erode profits and even lead to losses.

Derivative Risk: Under extreme market conditions, perpetual contracts may face liquidation, leading to a failure in hedging and affecting the stability of USDe.

Exchange Risk: Reserve assets are held in centralized exchanges, and if the platform experiences a bank run or collapse, the safety of the funds is at risk.

Liquidity Risk: During market panic, there may be significant discounted trading of USDe, making it difficult to redeem at 1:1 in the short term.

Regulatory Uncertainty: Although USDtb has complied with the US GENIUS Act, the regulatory positioning of USDe itself remains vague in various countries.

Geographic Restrictions: Currently, sUSDe is not available to EU residents.

Investors should determine the allocation ratio based on their own risk tolerance, avoiding putting all funds into a single stablecoin project.