Original author: @cmdefi
Original source: X
Original title: The in-depth penetration of the stablecoin market initiated by Ethena
Core Idea: A crypto-native synthetic USD stablecoin, a structured passive income product between centralized and decentralized, where assets are custodial on-chain and maintain stability while earning yield through delta neutrality.
- The background of the birth is that USDT&USDC, represented by centralized stablecoins, dominates the stablecoin market, the collateral of decentralized stablecoin DAI gradually tends to be centralized, and the algorithmic stablecoin LUNA&UST crashes after a huge increase to the top five stablecoin market capitalization. Ethena was born to create a compromise and balance between the DeFi and CeFi markets.
- The OES service provided by the institution custodial assets on the chain, and the amount is mapped to the centralized exchange to provide margin, retaining the characteristics of DeFi to isolate the on-chain funds from the exchange, so as to reduce the risk of misappropriation of funds and insolvency by the exchange. On the other hand, it retains the characteristics of CeFi and obtains sufficient liquidity.
- The underlying income is composed of the staking income from Ethereum liquidity derivatives and the funding rate income obtained from opening hedged positions on exchanges. It is also known as a structured income product of national funding rate arbitrage.
- Liquidity is being incentivized through a points system.
Its ecological assets include:
- USDe - stablecoin, minted by depositing stETH (more assets and derivatives may be added in the future).
- sUSDe - Voucher tokens obtained after staking USDe.
- ENA - Protocol Token/Governance Token, which currently flows into the market after being exchanged for points in each period, locking ENA can obtain greater credit acceleration.
Research Reports
1/6 • How USDe stablecoins mint and redeem stETH into the Ethena protocol, i.e., USDe can be minted at a 1:1 ratio. The deposited stETH is sent to a third-party custodian to map the balance to the exchange via an "off-exchange settlement", and Ethena then opens a short ETH perpetual position on the CEX to ensure that the collateral value remains delta-neutral or unchanged in USD.
- Ordinary users can acquire USDe in permissionless external liquidity pools.
- Authorized institutions that have been screened by KYC/KYB and whitelisted can mint and redeem USDe at any time directly through the Ethena contract.
- Assets are always kept in transparent on-chain escrow addresses, so they don't rely on traditional banking infrastructure and aren't affected by exchange misappropriation, bankruptcy, etc.
2/6 • OES - Off-exchange Settlement (CEDEFi) is an over-the-counter custody settlement method for funds, which takes into account both on-chain transparency and traceability and the use of funds on centralized exchanges.
- MPC technology is used to build a custodian address, and the user's assets are kept on-chain to maintain transparency and decentralization, and the address is jointly managed by the user and the custodian, eliminating the counterparty risk of the exchange and greatly mitigating the potential security problems and fund abuse problems. This maximizes the assurance that assets are in the hands of the users themselves.
- OES providers typically work with exchanges to enable traders to map asset balances to exchanges from wallets they jointly control to complete related transactions, financial services. This would, for example, allow Ethena to hold funds in custody off-exchange, but still use those funds on the exchange to collateralize Delta hedged derivatives positions.
The MPC wallet is currently seen as the perfect option for the United Group to control a single pool of crypto assets. The MPC model distributes a single key in separate units to their respective wallet users, who jointly manage the escrow address.
fireblocks off-exchange settlement
cobo SuperLoop3/6 • 盈利方式
- Ethereum staking income brought by ETH liquidity derivatives.
- Funding rate income from opening short positions on exchanges, Basis Spread income.
The "Funding Rate" is a regular payment made to traders who hold long or short positions based on the difference between the spot price and the perpetual contract market. As a result, traders will pay or receive funds depending on the need to hold long or short positions. When the funding rate is positive, the long position is paid to the short position, and when the funding rate is negative, the short position is paid to the long position. This mechanism ensures that the prices of the two markets do not deviate for a long time. "Basis" means that since spot and futures are traded separately, their prices are not always consistent. The deviation in their price is called a Basis Spread, and as the futures contract approaches expiry, the price of the futures contract usually tends to the corresponding spot price. At expiry, a trader holding a long contract needs to buy the underlying asset at the predetermined price of the contract. Therefore, as the futures expiration date approaches, the basis should tend to 0. Ethena develops different strategies for arbitrage by using fund balances mapped to exchanges, which provides a diversified yield for on-chain USEe holders. 4/6 • Yield and SustainabilityIn terms of yield, the annualized yield earned by the protocol in the past month is up to 35%, and the yield allocated to sUSDe is 62%. The difference here is due to the fact that USDe is not all converted to sUSDe through staking, and in fact it is basically impossible to achieve 100% pledge rate, if only 50% of USDe staking is converted to sUSDe, then this part of sUSDe is equivalent to capturing 100% of all the benefits with 50% of the staking amount. Because the application scenarios of USDe will enter DeFi protocols such as Curve and Pendle, this not only meets the needs of different application scenarios, but also potentially improves the yield of sUSDe.
However, as the market cools down and the long funds in the exchange become less, the funding rate income will also decrease, so after entering April, there is a clear downward trend in comprehensive income, with the current Protocol Yield reduced to 2% and the sUSDe Yield reduced to 4%. Therefore, in terms of yield, USDe is more dependent on the futures contract market in centralized exchanges, and will also be subject to the size of the futures market, because when the issuance of USDe exceeds the corresponding futures market capacity, the conditions for USDe to continue to expand will no longer be met. 5/6 • ScalabilityThe scalability of stablecoins is crucial, and it refers to the conditions and possibilities for increasing the supply of stablecoins. Stablecoin protocols like Maker often limit scalability due to overcollateralization requirements, requiring more than $1 in collateral to mint $1. Ethena is unique in that the main constraint on its scalability will be the ETH perpetual market, Open Interest. Open Interest refers to the total number of open interest in an exchange. Here, it specifically refers to the total value of ETH's open positions in perpetual contracts on centralized exchanges. The current figure is around $12 billion (April 2024). This figure reflects the current level of market participants' holdings of ETH. Compared with Ethena's initial stage from the beginning of 2024, ETH Open Interest has grown from 8 billion to 12 billion, and recently Ethena has supported the BTC market, and the current BTC Open Interest is about 30 billion. The issuance volume of USDe is about 2.3 billion US dollars, of course, this includes the influence of many factors, such as the organic growth of market users, the price growth of ETH and BTC, etc. But it's important to note here that the scalability of USDe is closely related to the size of the perpetual market. This is also the reason why Ethena cooperates with centralized exchanges, in 2023, UXD Protocol, a stablecoin project on the Solana chain, uses the same delta-neutral method to issue stablecoins, but it chooses an on-chain decentralized exchange to implement a hedging strategy, but due to the limited liquidity on the chain, when the stablecoin issuance reaches a certain scale, it means that a larger number of short selling operations are required, which ultimately leads to a negative funding rate, incurring a lot of additional costs, plus UXD Mango was shorted using Mango, a leverage protocol on the Solana chain, and Mango was later attacked on the chain, which eventually led to the failure of the project for multiple reasons.
At present, the market capitalization of USDe is about $2.3 billion, ranking 5th in the overall market value ranking of stablecoins, which has surpassed most decentralized stablecoins and is still 3 billion US dollars away from DAI. At present, ETH Open Interest is close to the all-time peak level, and BTC Open Interest has reached an all-time high, so the expansion of USDe's market capitalization must increase short positions of corresponding value in the existing market, which is challenging for USDe growth at this stage. As the main source of revenue for USDe, the funding rate is a mechanism used in perpetual contracts to adjust the price to be closer to the spot market, which is usually achieved by paying regular funding fees from long to short or short to long. When an excess of USDe is issued, shorts in the market increase, which may gradually push the funding rate down or even become negative. If the funding rate decreases or becomes negative, it may reduce Ethena's earnings from the market. With the same market sentiment, this is a typical market supply-demand balance problem, and a balance needs to be found between expansion and yield. If we consider that the market sentiment is going to a bull market and the price is rising, the theoretical capacity of issuing USDe will increase, on the other hand, if the market sentiment is going to a bear market and the sentiment of going long with the price falling decreases, the theoretical capacity of issuing USDe will decrease. Combined with yield and scalability, USDe could become a high-yield, short-term limited-scale, long-term market tracker.
6/6 • Risk Analysis Funding Rate Risk - When there is insufficient longs in the market, or when USDe is overissued, there will be a negative return on the funding rate, and Ethena needs to pay fees to the longs as a short. Although at this point, Ethena has come to the conclusion based on historical data that the market is positive for most of the time. In addition, Ethena uses LST (e.g., stETH) as collateral for USDe and can provide an additional margin of safety for negative fees in the form of an APY of 3-5% earned on stETH. However, it is worth noting that there have been similar protocols that have tried to scale up synthetic USD stablecoins, but all failed due to yield inversion.
ETH Open Interest Weighted Perpetuals Funding Custody Risk - Funds custody relies on OES and centralized institutions that provide services. Exchange bankruptcy may result in losses on unsettled profits, and OES institutional bankruptcy may result in delays in accessing funds, and while OES has adopted MPC and the most concise way possible to keep funds, there is still a theoretical possibility that funds may be stolen. Liquidity risk - If a position needs to be closed or adjusted quickly at a certain moment, a large amount of money may face the problem of illiquidity, especially when the market is tight or panicked. Ethena tries to mitigate and solve this problem by partnering with centralized exchanges, such as progressive liquidation, gradual closure of positions, or other facilitation policies to mitigate market shocks, which may provide a lot of flexibility and advantages, but it also means introducing centralization risk. Asset Anchoring Risk - stETH and ETH are theoretically 1:1 pegged, but there have been brief decouplings in history, mainly before the Shanghai upgrade, and there may still be some unknown risks at the liquidity derivatives level of Ethereum in the future. Asset decoupling may also trigger liquidation on exchanges. In order to address the risks mentioned above, Ethena has set up an insurance fund, which is financed by the distribution of income in each cycle agreement, and a portion of which is credited to the insurance fund.
cmDeFi Research