Ethena

What Is Ethena?

Ethena is a financial protocol on the Ethereum blockchain that offers a novel approach to stablecoin design through its synthetic dollar, USDe. This project stands out by employing a “delta-neutral” strategy, which uses paired positions in cryptocurrency and derivative contracts to maintain stability and generate yield. By creating a synthetic dollar that is not tied to traditional banking systems but is instead backed by decentralized finance mechanisms, Ethena provides a unique solution for users seeking stability and yield in the crypto space.

What is USDe?

Ethena’s USDe is a synthetic dollar backed by a “delta-neutral” position that goes long spot stETH (and BTC) and simultaneously short an equivalent ETH-PERP (and BTC-PERP) position. The net effect is that both positions offset one another and therefore USDe is theoretically able to maintain its 1:1 peg.

Background

Historically, the natural resting state of perpetual futures funding rates has been “long-biased”. This means that being short ETH-PERP (or BTC-PERP) has typically paid out some handsome yields. By pairing this short ETH-PERP position with stETH, USDe harnesses both sources of yield simultaneously. This makes USDe especially attractive as a fungible yield bearing product that is able to compose with the rest of DeFi.

How does Ethena work?

Ethena can be understood through three core mechanisms:

Purchasing USDe: To purchase USDe, users either interface either (1) directly with liquidity pools by swapping their existing stablecoins (e.g. USDT) for USDe or (2) through Ethena’s front-end that routes this flow through the same liquidity pools.
Minting and Redeeming USDe: When users purchase USDe, this causes USDe to briefly trade at a marginal discount to the other stablecoins in the liquidity pool. Authorized Participants (APs) rebalance these pools by depositing collateral with Ethena and subsequently minting fresh USDe which they then swap for the other stablecoin. This ensures that USDe maintains its 1:1 peg with other stablecoins.
Staking USDe: Users are able to stake their USDe for sUSDe through the Ethena front-end. sUSDe is a reward-bearing token that accrues value from the yield that Ethena’s underlying delta-neutral position generates. sUSDe is subject to a 7-day un-staking period.

Risks

While under most circumstances, USDe should have no problem maintaining its 1:1 peg, there are certain risks that could undermine this:

Counterparty risk
Custody risk
Collateral Risk
Negative funding rates
Insufficient redemption liquidity
Technical risk (e.g. oracle, smart contract risk)

Key Takeaways

Ethena’s clever synthetic dollar design allows sUSDe to harness some of the most attractive risk-adjusted yields across all financial markets
Consequently Ethena as an interest rate arbitrage vehicle that brings structurally high perp funding rates to DeFi
While the Ethena team have highlighted the risks underpinning Ethena’s architecture and put risk measures in place, USDe and sUSDe come with inherent risks

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