Author: Kucoin
Translation: Blockchain in Vernacular
As a rising star in the field of decentralized finance (DeFi), Ethena (ENA) uses blockchain technology to provide innovative financial solutions. The platform aims to improve the functionality and scalability of financial transactions without relying on the traditional banking system. One of Ethena's core products is USDe, a synthetic dollar that provides stability and ease of integration for the digital financial ecosystem.
1. Features of USDe
USDe is pegged to the U.S. dollar at a 1:1 ratio, with the goal of maintaining value stability in the volatile crypto market. This peg mechanism is particularly important for users who need a reliable medium of exchange or a stable store of value, and can effectively hedge against the price volatility risks common in the cryptocurrency market.
1) What is Ethena?
Ethena is a DeFi protocol developed on the Ethereum blockchain, focusing on creating a synthetic dollar called USDe. The platform aims to provide a stable, scalable and censorship-resistant digital currency without relying on traditional banking infrastructure. By adopting a Delta hedging strategy based on Ethereum collateral, Ethena ensures the stability and security of USDe, making it an ideal choice for global transactions and savings.
2) Financial support
Ethena has received strong support from many well-known people and institutions in the cryptocurrency and financial fields. The startup raised $6 million in a seed round led by Dragonfly, a well-known venture capital firm focusing on the crypto field. In addition, BitMEX founder Arthur Hayes and his family office Maelstrom also participated in the investment. Other major supporters include well-known crypto derivatives trading platforms such as Deribit, Bybit, OK, Gemini and Huobi.
3) ENA — Ethena’s native token
ENA is the native utility token of the Ethena protocol and plays a vital role in the Ethena ecosystem. Users holding ENA can participate in protocol governance and vote on key decisions such as the risk management framework, the composition of USDe's supporting assets, and potential partners or integration solutions. In addition, ENA also maintains the stability and functionality of USDe through a variety of incentive mechanisms within the platform, and is a key link in the operation of the entire ecosystem.
4) What is Ethena’s synthetic dollar USDe?
USDe is a synthetic dollar issued by Ethena, which aims to provide a stable and scalable digital currency pegged to the value of the US dollar. USDe is designed to be a decentralized crypto-native dollar that does not rely on traditional financial infrastructure. Its stability is achieved through a combination of Delta hedging and minting-redemption arbitrage mechanisms. These features ensure that USDe can serve as a reliable medium of exchange and value storage tool in the crypto market, providing support for seamless and efficient transactions in the DeFi field.
2. How does the Ethena protocol work?
How Ethena's Internet Bond works | Source: Ethena Labs' Gitbook
1) Ethena’s core concept
Ethena uses Ethereum's blockchain framework to create a stable, scalable and censorship-resistant digital currency, known as the "Internet Bond". The platform maintains the stability of the currency and provides users with profit opportunities through an innovative Delta hedging strategy.
2) Minting USDe
On the Ethena platform, users can use Ethereum or its collateralized derivatives as collateral to mint USDe. The system automatically establishes a Delta neutral position to stabilize the value of USDe and resist the impact of volatility in collateral assets. This process includes opening a short position in the derivatives market equal to the value of collateralized Ethereum, thereby ensuring that fluctuations in the price of the underlying asset are offset by gains or losses on the derivatives position.
3) Stability of the Delta Neutral Mechanism
The core stabilization mechanism of USDe is the Delta hedging strategy. This strategy protects against price fluctuations in the crypto market by establishing a hedging position in the derivatives market that is equal to the Ethereum collateral. This design aims to keep the synthetic USDe stable and pegged to the US dollar. The adjustment of the hedging position is fully automated and can respond to market changes in real time to ensure stability.
4) Revenue generation
USDe is not only a stable currency, but also provides income opportunities for holders. The main sources of income include:
Staking rewards generated by Ethereum used as collateral;
Funding rate and basis income in delta hedging activities.
This dual-yield model makes USDe similar to traditional bonds, an investment that can accumulate value over time and is known as the "Internet bond."
5) Risk Mitigation
While Ethena is committed to building a stable and secure platform, it also recognizes the risks inherent in DeFi protocols, including smart contract risk, liquidity risk, and risks associated with external platforms. To mitigate these risks, Ethena adopts a diversified hedging strategy, uses multiple custody solutions, and ensures transparent verifiability of all transactions and positions through blockchain technology.
3. Ethena’s operating mechanism
Here is a specific example of how to obtain USDe (synthetic US dollars) by staking Ethereum (stETH):
1) User operation
Deposit stETH: The user deposits $100 worth of stETH (representing Ethereum that has participated in staking and can earn staking rewards) into the Ethena system.
Receive USDe: In return, the user receives the equivalent value of USDe, approximately 100 USDe (minus any transaction fees that may apply). This is based on a 1:1 USD peg.
2) Ethena Labs’ operations
Open a short position: After the user deposits stETH, Ethena Labs opens a short perpetual contract position on the derivatives trading platform with the same value as stETH. This is part of Ethena's Delta hedging strategy to stabilize the value of USDe.
OTC Settlement: The stETH deposited by users is managed through the "OTC Settlement" system. This mechanism ensures that the user's stETH is securely stored outside the trading platform, thereby reducing the counterparty risk caused by hacker attacks or bankruptcy of the trading platform.
4) Profit distribution
The staking rewards generated by users' stETH are collected by Ethena, and the platform will convert these earnings into more USDe and return them to users. This income distribution model provides users with stable returns and enhances the attractiveness of USDe as an income investment tool.
5) Summary of key points
Stability: Through the Delta hedging strategy (balancing the position of stETH collateral in the derivatives market), Ethena effectively reduces the volatility risk of the collateral assets and ensures the stability of USDe’s peg to the US dollar.
Security and Risk Management: Managing assets through an over-the-counter settlement mechanism reduces the impact of external threats on user deposits and provides a safer environment for investors.
Income Generation: Converting staking rewards into USDe provides users with predictable and stable returns, making USDe an ideal passive income tool.
4. Purpose of USDe
USDe is mainly used in trade, remittances and as a stable medium of exchange, simplifying and securing cross-border transactions without the need for traditional financial intermediaries. This makes it an ideal choice for businesses and individuals looking for efficient and low-cost solutions in international trade.
1) USDe as a medium of exchange
Ethena's USDe is a stable medium of exchange that can be used for a variety of financial transactions and avoids the volatility that other cryptocurrencies typically have. This stability makes USDe ideal for daily transactions, trading activities, and cross-border payments, especially in scenarios where exchange rate stability is critical.
2) Savings and investment tools
USDe, known as the "Internet bond", is not only a medium of exchange, but also a savings tool. By generating income through staking and hedging operations, USDe provides users with investment opportunities similar to traditional bonds, but operates in the DeFi market. This feature attracts investors who want to earn passive income while maintaining stable asset liquidity.
3) DeFi application scenarios
USDe is essential in DeFi applications, including borrowing, lending, and yield farming. Its stability and deep integration with the Ethereum blockchain allow it to be used as collateral for loans or as a liquid asset in decentralized exchanges (DEXs). This versatility broadens its application in the DeFi ecosystem, promoting safer and more efficient financial services.
4) Hedging and risk management
USDe can also be used as a hedging tool to deal with the volatility of the cryptocurrency market. In uncertain or adverse market conditions, traders and investors can convert volatile assets into USDe, thereby protecting their investments from large fluctuations and reducing potential losses, while retaining the opportunity to quickly enter the market and prepare for future investments.
5) Promote the popularity of cryptocurrency
USDe supports broader cryptocurrency adoption by providing a stable, scalable, and censorship-resistant form of money. It addresses common barriers to cryptocurrency adoption, such as volatility and complexity, enabling new users to enter the crypto market with greater confidence. USDe's stability ensures that users can seamlessly transition to a crypto-based financial system without having to worry about the immediate risks posed by other, more volatile cryptocurrencies.
6) Future Outlook
USDe has a wide range of potential applications. As the DeFi space continues to develop, USDe is expected to play an important role in decentralized lending, yield farming, and more complex financial instruments. This could have a profound impact on the entire cryptocurrency market, driving the wider adoption of cryptocurrency-based financial solutions by providing more stability and reliability.
7) Integration in major DeFi protocols
Ethena’s USDe has been integrated into major DeFi protocols such as MakerDAO, Frax, Curve Finance, and Aave, highlighting its growing importance and potential to reshape financial interactions on a global scale.
5. Comparison between USDe and other stablecoins
Explore other stablecoins and compare them to USDe | Source: Ethena Labs’ Gitbook
USDe is one of hundreds of stablecoins in the crypto market whose value is pegged to a real-world asset (in this case, the U.S. dollar). As a crypto-based synthetic dollar protocol, USDe differs from other stablecoins in the market in the following ways:
1) Stabilization mechanism
USDe: By using the delta hedging mechanism of Ethereum derivatives to offset the volatility of its collateral, it maintains its peg to the US dollar. This approach can ensure the stability of USDe even when the market fluctuates violently.
Traditional stablecoins (such as USDT, USDC): usually rely on fiat currency reserves to maintain the peg, which means that their stability depends on the adequacy of the reserves and the financial condition of the reserve custodian.
2) Decentralization
USDe: Running on a decentralized platform, no single entity controls its issuance or redemption process. This structure helps improve security and reduce the possibility of censorship or intervention.
Other DeFi stablecoins (such as DAI): DAI also operates on a decentralized framework, but uses an over-collateralization mechanism involving a combination of other cryptocurrencies, which may introduce different risks and dependencies.
3) Revenue generation
USDe: Provides intrinsic returns through its "Internet Bonds", which come from Ethereum staking and price differences in the derivatives market. This unique feature enables users holding USDe to directly obtain returns.
Other stablecoins: Most traditional stablecoins do not provide returns directly themselves, and users need to go through external channels, such as lending platforms or DeFi yield farms, to get returns.
4) Scalability and efficiency
USDe: Relying on the Ethereum network, it leverages existing DeFi protocols and infrastructure to achieve high scalability and efficiency, facilitating wider adoption and multi-platform integration.
Other stablecoins: Although they also have certain scalability, traditional stablecoins are usually limited by the reserve management of the traditional banking system and are slow to adapt to new blockchain technologies.
5) Risk and transparency
USDe: Provides highly transparent on-chain transactions and position records. However, the complexity of its delta hedging strategy and the potential risks that may be brought about by fluctuations in the derivatives market need to be taken seriously.
Other stablecoins: The risks of traditional stablecoins usually include counterparty risk, reserve audit transparency issues, and potential regulatory challenges. However, their operating mechanism is relatively simple, so some users may think that the risk is low.
6. Potential risks and challenges of thena and USDe
Before participating in the Ethena ecosystem, you need to be aware of the following potential risks and challenges:
1) Regulatory challenges
Ethena faces similar regulatory scrutiny as many DeFi projects, especially in the issuance of synthetic stablecoins like USDe, which may vary depending on the regulatory framework in different jurisdictions. The current regulatory environment is constantly evolving, and new rules may have an impact on stablecoins and how they operate. Response: Ethena actively communicates with regulators and seeks legal compliance in all operating areas. This includes strict KYC and anti-money laundering (AML) reviews of users, especially those who mint and redeem USDe.
2) Market acceptance
The popularity of USDe depends on user acceptance and its integration in mainstream DeFi platforms. Market acceptance may be slow, especially when users are cautious about new technologies or face competition from established stablecoins. Countermeasures: Ethena promotes the popularity of USDe by establishing strategic partnerships with major DeFi protocols in the crypto ecosystem and providing incentives for early adopters. In addition, through educational publicity and transparent operational communication, enhance user confidence in the advantages and operation of USDe.
3) Technical Challenges
Ethena's core technology (especially the delta hedging mechanism used to stabilize USDe) is complex and may have technical problems or vulnerabilities. The implementation of such complex mechanisms brings inherent risks, including smart contract vulnerabilities. Countermeasures: Ethena reduces risks through extensive testing and commissioning well-known third-party security companies to audit smart contracts. At the same time, the protocol infrastructure is continuously monitored and updated to ensure the robustness of technical protection measures against potential vulnerabilities.
4) Liquidity and volatility risks
As with any financial instrument, the risk of liquidity constraints, especially in times of market stress or rapid changes in investor sentiment, needs to be considered. In addition, although USDe is designed to be stable, its underlying collateral (ETH and its derivatives) is highly volatile. Countermeasures: Ethena addresses liquidity issues by maintaining a reserve fund and establishing deep liquidity pools on multiple trading platforms. For volatility, the protocol strictly implements its neutral hedging strategy to ensure that the synthetic dollar can remain pegged even if the underlying assets fluctuate.
5) Dependence on Ethereum
As a protocol built on the Ethereum blockchain, Ethena's operation is affected by Ethereum's scalability and gas fees, which may affect transaction costs and speeds. Countermeasures: Ethena plans to leverage Ethereum's second-layer solutions and may consider cross-chain integration to reduce high transaction fees and improve scalability. This not only improves efficiency, but also broadens the accessibility and user base of the protocol.
6) Counterparty Risk
Maintaining USDe stability through derivatives and other financial instruments means that the protocol is exposed to counterparty risk, especially in a decentralized environment where counterparties are not fully reliable or transparent. Countermeasures: Ethena selects reputable and reliable trading platforms and derivatives partners, and ensures that all positions are overcollateralized while maintaining transparency of hedging activities.
7. Summary
Ethena and its USDe stablecoin represent an important innovation in the field of decentralized finance. By leveraging Ethereum's robust and secure infrastructure, Ethena provides a crypto-native, stable and scalable digital dollar that not only breaks away from reliance on the traditional banking system, but also introduces a yield-generating asset in the form of "internet bonds."
USDe uses an advanced Delta hedging strategy to maintain its stability, which distinguishes it from traditional stablecoins and provides users with a reliable value storage tool while actively generating returns. This innovative approach solves the volatility problem commonly associated with cryptocurrencies, making USDe a viable solution for daily transactions, savings, and financial planning in a decentralized environment.
As the DeFi space continues to grow, Ethena's commitment to transparency, security, and user-centric innovation may play a vital role in shaping its trajectory. While it remains to be seen whether it can gain a foothold in the rapidly growing digital finance sector, its potential to redefine the perception and application of stablecoins and synthetic assets in the DeFi ecosystem is unquestionable. The continued development, popularity, and integration of Ethena and USDe may bring a new standard of stability and functionality to the cryptocurrency market.
