Written by: Terry
The stablecoin track has always been regarded as one of the holy grails of the crypto world. Whether it is Tether's USDT or Terra's UST, they have played an important role as heavyweight players in the industry.
In the past two months, a new project with a high yield label has emerged and quickly become the fifth largest stablecoin in the entire network: On February 19, USDe issuer Ethena Labs launched a public mainnet, aiming to create a synthetic dollar USDe based on Ethereum (ETH). As of the time of writing, the supply has exceeded 2.366 billion, second only to USDT, USDC, DAI, and FDUSD.
Source: https://www.coingecko.com
So what kind of stablecoin project is USDe? How did it break through the siege in such a short time? What controversies are hidden behind it? At the same time, what new variables are contained in the recent stablecoin track?
The fast-rising stablecoin USDe
The biggest impact of USDe on the stablecoin market is undoubtedly that after only two months of launch, its total volume has rapidly risen from 0 to over 2.3 billion US dollars thanks to its high yield attribute.
Data from the Ethena Labs official website shows that as of the time of writing, the annualized yield of USDe is still as high as 11.6%, and it had previously maintained at over 30%, which reminds people of UST in the Anchor Protocol, which has an annualized yield of up to 20%.
Ethena protocol annualized rate of return and USDe annualized rate of return
So what kind of stablecoin mechanism is USDe, and why does it have such a high annualized return? Behind this is actually the perfect version of the Satoshi dollar concept mentioned by the founder of BitMEX in the article "Dust on Crust".
In short, if we exclude the expected Airdrop income, the current high income sources of USDe are mainly from two aspects:
ETH’s LSD staking income;
Funding rate income from delta hedge positions (i.e. short positions in perpetual futures);
The former is relatively stable, currently fluctuating around 4%, while the latter depends entirely on market sentiment. Therefore, the annualized return of USDe is also directly dependent on the funding rate of the entire network (market sentiment) to some extent.
The key to the operation of this mechanism lies in the "Delta neutral strategy" - if an investment portfolio consists of related financial products and its value is not affected by small price changes of the underlying assets, such an investment portfolio has the nature of "Delta neutrality".
That is to say, USDe will form a "Delta neutral strategy" through equal amounts of spot ETH/BTC long positions and futures ETH/BTC short positions: the Delta value of the spot position is 1, the Delta value of the futures short position is -1, and the Delta value after hedging the two is 0, which means that "Delta neutrality" is achieved.
To put it simply, when the USDe stablecoin module receives user funds and buys ETH/BTC, it will simultaneously open an equal amount of short positions, thereby maintaining the value of each USDe position stable through hedging, which ensures that there is no risk of liquidation loss for the mortgaged position.
Assuming the BTC price is $80,000, for example, if a user deposits 1 UBTC, the USDe stablecoin module will simultaneously sell 1 futures BTC, forming USDe’s “Delta Neutral” investment portfolio.
For example:
If BTC is initially $80,000, then the total value of the portfolio is 8+0=$80,000, so the total position value is still $80,000;
If BTC drops to $40,000, the total value of the portfolio is still $4+4=$80,000, so the total position value is still $80,000 (the same is true if it rises);
At the same time, the corresponding futures short position in the USDe stablecoin module can obtain funding rate income from long payments because it has opened a short perpetual futures of 1 BTC (looking back at history, the funding rate of Bitcoin has been positive for most of the time, which also means that the overall return of short positions will be positive, and this situation is even more so in the context of strong bullish sentiment in the bull market).
With the combination of the two, the annualized yield of USDe can reach 20% or even higher. It can also be seen that when the market is extremely bullish, the annualized high yield of USDe is particularly guaranteed - because Ethena Labs took advantage of the opportunity to earn funding rates by shorting in the bull market.
Old Ponzi or new solution?
Interestingly, the debate about ENA/USDe in the community has become increasingly louder recently, and many people even compare it to the former Terra/Luna, calling it a new version of Terra/UST's Ponzi scheme of stepping on the right foot with the left foot.
In fact, objectively speaking, the first half of USDe's stablecoin generation/stabilization mechanism is significantly different from Terra's gameplay. It does not belong to the gameplay of Tiyunzong (Tiyunzong, a unique skill of Wudang school, meaning that you can ascend to heaven by stepping on your left foot with your right foot). On the contrary, since it is harvesting all traders who are long in the bull market and pay for it, the high yield is supported. This is also the biggest difference between it and Terra.
What is worth noting is actually the second half of Ethena - once it encounters the test of depegging, it may really embark on a negative spiral suicide path similar to LUNA/USDe, resulting in the possibility of bank runs and accelerated collapse.
That is to say, there may be a nonlinear sentiment singularity - the funding rate continues to be negative and continues to widen, the market begins to discuss Fud, the USDe yield drops sharply + the de-anchor discount, and then the market value plummets (user redemption):
For example, if the value of Ethena drops from $10 billion to $5 billion, Ethena must close its short positions and redeem the collateral (such as ETH or BTC). If any problems arise during the redemption process (wear and tear caused by liquidity problems under extreme market conditions, large market fluctuations, etc.), the anchoring of USDe will be further affected.
Source: coinglass
This negative feedback mechanism may be maliciously attacked, triggering the singularity, and thus facing a negative spiral dilemma similar to the UST collapse. Therefore, for investors, whether this "collapse singularity" will occur, when it will occur, and whether they can withdraw in time are the key to whether they can get out of the USDe bull market game unscathed.
Then we need to keep a close eye on factors such as the proportion of Ethena's ETH and BTC holdings in the entire network, the negative funding rate of the entire network, etc. It is worth noting that with the recent sharp correction in the market, the funding rates of BTC and ETH in the entire network have dropped significantly from more than 20% annualized, and have even begun to show a negative trend. The latest data shows that BTC is -1.68% and ETH is 0.32%.
Data from Ethena Labs’ official website shows that the total value of USDe’s Bitcoin collateral assets exceeds US$800 million, and its Ethereum position exceeds US$1 billion, accounting for nearly 80% of the total.
Because Ethena is actually harvesting all cryptocurrency traders who are long in the bull market and pay funding fees for it, the high yield is extremely dependent on the positive funding rate behind the market sentiment. From this perspective, if the funding rate of the entire network continues to turn negative or even increases, USDe will likely face the test of a sharp drop in yields.
The rise and fall of the stablecoin market
From a macro perspective, the stablecoin track has always been a lucrative super cake. In horizontal comparison, the money-printing attributes of leading players such as Tether are even no less than CEX:
Tether generated about $6.2 billion in net revenue in 2023, 78% of Goldman Sachs ($7.9 billion) and 72% of Morgan Stanley ($8.5 billion) in the same period, while Tether has about 100 employees, compared to the latter's 49,000 and 82,000 employees, respectively.
Net income, total number of employees, and employee income of major companies as of December 31, 2023. Source: @teddyfuse
Previously, in the article "US$700 million in quarterly revenue! Seeing USDT making a fortune quietly, you will understand why the stablecoin market is so crowded", it was mentioned that Tether is currently almost the most profitable crypto company besides trading platforms (among CEX, perhaps only Binance can hold the top spot).
For Web3 projects and crypto companies that are generally still operating at a "loss" and selling tokens for subsidies, it is even more out of reach. This is one of the main reasons why the stablecoin business is so popular.
According to CoinGecko data, among the top five stablecoin players, the total circulation of USDT has exceeded 109 billion US dollars, accounting for about 69% of the total stablecoin volume in the entire network, and is firmly in the lead.
In addition to the dominant USDT, since the US regulators closed Silicon Valley Bank on March 10, 2023, the net outflow of USDC has exceeded US$112 billion, and the total circulation has dropped to around US$33 billion, a decrease of about 30%, temporarily ranking second, and is far ahead of the third-ranked DAI (US$5 billion).
In addition, BUSD has been replaced by FUSD due to regulatory pressure, and as Binance accelerated the frequency of LaunchPoll, the total amount quickly exceeded US$3.5 billion; followed by the emerging USDe, which brought new variables that are worth looking forward to.
In general, with decentralized stablecoins eliminating stability considerations and centralized stablecoins facing "reserve + supervision", decentralized stablecoins have become the market's biggest expectation for the "holy grail" of the stablecoin industry. Therefore, high-yield USDe can rise rapidly.
Moreover, we are only in the early stages of the long-term stablecoin competition. The arrival of new players such as FDUSD and USDe is likely to change the competitive landscape and bring new variables to the stablecoin market, which is worth looking forward to.