Written by Heechang, Four Pillars
Compiled by: Glendon, Techub News
As the crypto industry develops, stablecoins have found a clear product-market fit. At the same time, stablecoin issuers are reaping substantial rewards. For example, USDT issuer Tether achieved a net operating profit of $1.3 billion in the second quarter of 2024, outperforming many traditional financial companies.
And this success is not limited to established players, new entrants such as Ethena and PayPal (which launched the US dollar stablecoin PYUSD) are also quickly emerging in this field.
Since its launch in December 2023, Ethena's circulating supply has exceeded $3 billion and generated more than $75 million in fee income. At the same time, the protocol is actively diversifying its stablecoin products, planning to launch UStb, a stablecoin based on BlackRock's tokenized fund BUIDL. Ethena also plans to launch its own network and build USDe-based applications on it.
It can be seen that the stablecoin landscape is evolving rapidly. Today, the distribution channels and revenue sources of stablecoins have become increasingly important. The competition among stablecoins has also gradually expanded from the initial cryptocurrency startups to financial giants such as BlackRock and BitGo, as well as fintech companies such as PayPal, Robinhood and Revolut.
Nowadays, a new "stablecoin war" is about to start. This article will start with "Ethena Case Study - The Fastest Growing Stablecoin" to analyze the business model and success factors of Ethena USDe. Can USDe change the competitive landscape of the stablecoin market? What lessons can latecomers learn from it?
来源：Size of the Opportunity | Ethena Labs
Ethena Case Study — The Fastest Growing Stablecoin
Source: X (@leptokurtic)
With its unique mechanism design, Ethena's synthetic stablecoin USDe has achieved amazing growth, reaching a market value of $3 billion in just four months. This rapid expansion makes it the fastest growing stablecoin to date, surpassing competitors such as DAI, USDT, FDUSD, and USDC. How did it do it?
USDe’s success factors are as follows:
Unique high-yield strategy that cannot be easily replicated;
Robust collateral management
Comprehensive expansion plan
Revenue Sources
First, we need to know how USDe maintains stability. Ethena keeps the value of USDe close to $1 through a delta-neutral hedging strategy. Simply put, when a user mints USDe using ETH as collateral, Ethena opens an equal amount of perpetual futures short position on a derivatives exchange. This creates a delta-neutral position in which price fluctuations in the ETH collateral are offset by the opposite fluctuations in the futures short position. This strategy can maintain a stable value and leverage the liquidity of centralized exchanges to improve capital efficiency without over-collateralization.
This approach combines crypto-native solutions with off-chain opportunities to back stablecoins with short positions in crypto assets and futures. So, how do its benefits come about?
Staked USDe (sUSDe) launched by Ethena is a yield token that users can earn by staking their USDe tokens. sUSDe provides high returns through a combination of staking rewards and basis trading strategies.
sUSDe’s main sources of income:
Staking Rewards: It earns profits from underlying collateral such as stETH (staked Ethereum) and obtains basic income from Ethereum's proof-of-stake system.
Market Strategy (Delta-Neutral): Profit from funding and basis in perpetual contracts and futures markets. Adopt a Delta-neutral approach, holding long positions in spot assets and short positions in perpetual futures. This approach allows the protocol to take advantage of positive funding rates, where long positions pay short positions.
Stablecoin income: Ethena receives fixed income from two stablecoin sources. It received 295 million USDC through Coinbase’s loyalty program and 400 million sUSDS income from lending fees on the Sky protocol (formerly known as Maker).
"Unforkable" architecture
What makes Ethena unique is its "unforkable" architecture. Unlike most AMM DEXs, Ethena's structure cannot be easily replicated. First, traders conduct basis trades on major centralized exchanges (CEXs) such as Binance, Bybit, and OKX, but the collateral is held by over-the-counter settlement (OES) providers such as Copper, Ceffu, and Coinbase Custody. This complex relationship and design explains why there are no similar protocols that have spread widely in various ecosystems.
Source: The Internet Bond | Ethena Labs
Collateral Management: Ethena UStb, Liquid Stablecoins, and Reserve Funds
Source: Positions | Ethena
As a stablecoin, USDe requires active management to balance potential risks and high returns. Ethena mainly uses three methods to ensure collateral management, including:
Ethena UStb (coming soon): This upcoming US Treasury token is backed by BlackRock’s BUIDL fund and is planned as a strategic backstop. During periods of negative funding rates, Ethena can move reserves to UStb, reducing exposure to costly perpetual futures contracts and investing in more stable assets instead.
Liquid Stablecoins: Ethena utilizes Circle’s USDC and Sky (formerly MakerDAO)’s USDS as part of its collateral strategy. These liquid stablecoins provide a stable yield component, helping to buffer relatively mild negative funding rates and diversify the protocol’s revenue streams.
Reserve Fund: Ethena maintains a $46.6 million safety net to cover potential losses during periods of negative funding rates. The fund is activated when negative interest rates exceed collateral yields, protecting sUSDe holders.
In a situation where positive funding rates dominate, Ethena’s strategy can really shine. USDe can generate high yields through basis trading of crypto assets, allowing Ethena to allocate most of its collateral (up to 90%) to this strategy, maximizing the returns of sUSDe holders.
However, when the funding rate drops sharply, Ethena will have to face a decline in yields, which has become the main reason why the market questions the stability of Ethena's earnings.
It is worth noting that Ethena’s recently planned stablecoin UStb may become a catalyst in its development process.
Announcing the plan at the end of September, Ethena said UStb could help USDe through difficult market conditions, explaining that “if Ethena’s management deems it necessary and appropriate, during periods of negative funding rates, Ethena will be able to close USDe’s hedge position and reallocate its collateral assets to UStb to further improve associated risks.”
In theory, once USTb is launched, once funding rates turn negative and crypto sentiment turns bearish, Ethena can shift its collateral allocation to this more stable asset. This strategic shift can play two key roles:
USTb sets a floor on sUSDe yields: By leveraging USTb and other stable assets, Ethena can ensure a minimum yield even in bearish conditions. This helps maintain its appeal to sUSDe holders, as the minimum yield will be close to Treasury bill yields.
USTb reduces the volatility of sUSDe yields: During "bear markets", the shift to more stable collateral will undoubtedly lead to lower yield volatility. But this increased stability is particularly attractive to some risk-averse investors who seek consistent returns even in challenging market conditions.
This flexibility helps Ethena maintain high returns under different market conditions. In addition, the relationship between funding rate and UStb allocation is simple and direct: when the funding rate is negative, UStb allocation will increase, even from 50% to 70%, thereby avoiding negative returns. Conversely, when the funding rate is positive, UStb allocation will decrease.
Source: X (@ethena_labs)
In addition to protecting the interests of sUSDe holders, the reserve fund is also strategically allocated to income-generating resources such as Blackrock BUIDL, Superstate, SKy, and Mountain Protocol. This model enables Ethena to maximize the utility of the fund, potentially generating additional income, thereby further increasing the reserve fund.
Ethena Expansion Strategy
Ethena is implementing a comprehensive expansion strategy covering both horizontal and vertical growth:
Horizontal expansion: This involves product diversification and a multi-chain approach. Ethena is expanding its product range and extending to multiple blockchains. The strategy aims to cover a wider user base and reduce dependence on a single blockchain.
Vertical expansion: Ethena is developing its own network infrastructure and working with off-chain exchanges. By building infrastructure, the protocol can enhance operational control and capture more value, such as from sorter revenue. Collaboration with exchanges also improves the liquidity and accessibility of Ethena products.
Horizontal expansion: LayerZero’s multi-chain strategy
Ethena has developed a multi-chain expansion strategy through its partnership with LayerZero. The partnership leverages the Omnichain Fungible Token (OFT) standard, which enables Ethena to expand the reach of its tokens to 16 different blockchains. Currently, Ethena's native token ENA, as well as its stablecoins USDe and sUSDe, can be accessed on multiple blockchains.
The OFT standard uses a “minting-destruction” mechanism that keeps the token supply consistent across all connected chains without the need for wrapped assets or additional liquidity pools. Ethena uses this approach to simplify cross-chain transactions while potentially reducing associated costs and risks.
Source: Hashed’s Ethena data dashboard
Vertical expansion: Building the Ethena Network and its ecosystem
Ethena Network is an upcoming initiative of the Ethena protocol. This new network aims to create an ecosystem of financial applications with USDe as the underlying asset.
The network is planned to serve as a base layer for other financial applications and incorporate a liquidity aggregation layer. This functionality is also expected to support existing centralized and decentralized exchanges. In doing so, Ethena aims to position itself at the intersection of currency, network, and exchange functions in the crypto world.
Currently, Bybit has partnered with Ethena to integrate USDe on its platform. A key goal of Ethena is to position USDe as a trading collateral on CEX. By allowing users to earn returns from margin assets on CEX futures, USDe can also create more advantages in the trading ecosystem.
Source: Ethena 2024 Roadmap: The Holy Grail: Internet Money
Dissecting Stablecoins: Collateral and Yields
Based on the above mechanisms and strategies, Ethena has successfully entered the market dominated by Tether (USDT), Circle (USDC) and DAI. However, competition in the stablecoin market is not limited to issuing new stablecoins, and the strategies for building stablecoins are becoming more and more diverse.
Source: Stablecoin Circulation - DefiLlama
How are stablecoins classified? Stablecoins use collateral and active management to maintain a value of $1. Each issuer has a system to maintain value and mint or redeem coins.
The type of collateral affects how stablecoin holders earn returns. Previously, issuers such as Tether and Circle have earned significant revenue by earning returns from collateral. Currently, many projects provide returns directly to holders. This section will examine the various types of collateral supporting stablecoins and their sources of returns.
Collateral: The foundation of stablecoins
Collateral has become key in the stablecoin ecosystem, especially after events such as the Terra UST debacle and concerns about USDT transparency. Today, stablecoin projects ensure that reputable entities that use reliable assets provide transparent, secure backing.
There are five main types of collateral currently used by stablecoin issuers, but most projects use several of them rather than relying on just one.
1. Crypto Asset Delta Neutral: This strategy uses the price difference between spot and futures cryptocurrency markets to maintain the peg of stablecoins, such as Ethena's USDe and Elixir's deUSD. USDe uses a Delta Neutral approach, combining long spot and short perpetual futures positions on Ethereum to generate returns. The strategy features CEX integration and active collateral management, which can be optimized under various market conditions.
2. Cryptocurrency over-collateralization: These stablecoins use more cryptocurrencies as collateral to buffer market fluctuations. DAI issued by MakerDAO is a typical example, which uses various cryptocurrencies with a minimum collateralization ratio of 150%. USDD, Frax, and GHO also use similar strategies, usually combining over-collateralization with other stabilization mechanisms. For example, Frax uses a fractional algorithm mechanism.
3. Fiat-collateralized: These stablecoins are backed by traditional currencies held by centralized entities. This category includes popular stablecoins such as USDT, which is backed by cash, cash equivalents, and other assets, and Circle (USDC), which is backed by cash and short-term U.S. government bonds. In addition, there is Binance USD (BUSD), TrueUSD (TUSD), Pax Dollar (USDP), and Gemini Dollar (GUSD), each with a unique backing mechanism.
4. US Treasury-backed: This type of stablecoin combines traditional finance. Examples include Ondo’s USDY, Mountain Protocol’s USDM, and Blackrock’s BUIDL. They are usually backed by short-term US government debt. As mentioned above, Ethena’s UStb is backed by short-term US Treasury bonds and bank demand deposits from Blackrock BUIDL, providing exposure to government bond yields and the flexibility of cryptocurrencies.
5. Private credit backing: This approach uses private credit instruments as collateral. Anzen’s USDz is a typical example, backed by corporate bonds, loans or other forms of private debt. Compared to fiat-backed stablecoins, this approach has higher yield potential while maintaining stability through risk management and portfolio diversification.
As the industry matures and the types of collateral in the stablecoin market continue to expand, there is no doubt that transparency, security, and regulatory compliance will become increasingly important in determining the success and adoption of stablecoin projects.
Source of income: How stablecoins generate income
Currently, the development of stablecoins has long surpassed simple price stability. It has provided a mechanism for generating income, providing users with opportunities for passive income. These incomes come from a variety of strategies, making stablecoins more attractive. The main sources can be divided into:
1. Funding yield from basis trades: This strategy exploits the price difference between the cryptocurrency spot and futures markets, allowing stablecoins to maintain their pegs while generating yield.
2. U.S. Treasury Bills: Some stablecoins are backed by U.S. Treasury Bills. These stablecoins earn interest on short-term government debt. For example, Mountain Protocol’s USDM is backed by short-term U.S. Treasury Bills, passing on the earnings to USDM holders.
3. Staking Revenue: Some stablecoins allow users to stake their tokens within the protocol, thereby earning rewards for contributing to network stability and security.
4. DeFi Mechanism: Stablecoins can earn income through various DeFi practices, such as providing liquidity for AMM pools or yield farming. For example, OUSD (Origin Dollar) distributes its collateral to multiple DeFi protocols, uses lending platforms such as Compound and Aave, and earns transaction fees by providing liquidity for them. In addition, the DAI Savings Rate (DSR) module allows DAI holders to earn income by depositing tokens and distributes the interest of Maker Protocol lending activities to participants.
Collateral and yield volatility
Stablecoins are called “stablecoins” because they are designed to maintain a stable value relative to a specific asset or benchmark (usually the U.S. dollar), that is, to provide a reliable medium of exchange in the crypto ecosystem.
However, some stablecoins have experienced minor decoupling in the past. For example, Tether has been accused of lack of transparency leading to unstable value, and USDC also experienced a brief decoupling during the Silvergate collapse due to investors' concerns about the solvency of the collateral.
So, what other fluctuations may occur in the collateral and yields of stablecoins?
Source: USDC price during the Silvergate crash 2023.03.11 | CoinGecko
Collateral Risk
For large assets, stablecoins backed by fiat currencies and US Treasury bonds are considered the safest. They have less risk and are mainly related to the entity holding the assets. These stablecoins are regulated and insured by the national financial system.
Source: Overview of Stablecoin Regulation
The stability of Delta-hedged synthetic dollars (such as Ethena's USDe token) is actually facing some doubts. The main concern is the possibility of negative funding rates in derivatives markets, which may lead to losses if the cost of maintaining a short position is higher than the collateral yield. Other risks include reliance on centralized exchanges for derivatives trading, potential liquidity issues during market stress, and the possibility of collateral assets (such as stETH) losing their peg to ETH.
Source: Stablecoin Monitor
Yield volatility
The yields of stablecoins backed by Treasury securities are susceptible to the interaction of complex economic factors and market dynamics. The primary driver of these yields is the interest rate on the underlying Treasury securities, which is directly affected by the Federal Reserve’s monetary policy.
When the Fed adjusts interest rates, it has a ripple effect throughout financial markets, including the yields offered by stablecoins. For example, during periods of monetary tightening, Treasury yields typically rise as the Fed raises interest rates. This makes it possible for stablecoin issuers to offer higher yields to their users. Conversely, when Treasury yields fall, users also receive less.
It is important to note that most fiat-backed stablecoins are created from a mix of cash and Treasuries, and their yield curves vary depending on the collateral they support and the issuer. For example, BlackRock's BUIDL stablecoin is backed by a mix of cash, Treasuries, and other short-term government securities, and as a regulated product of a large financial institution, BUIDL's yield is closely tied to the prevailing Treasury rate. However, these yields are not immune to the volatility that comes with broader market conditions and changes in monetary policy. Over the past 10 years, the 1-year US Treasury rate has fluctuated between 0.1% and 5.5%.
Source: 1-Year Treasury Rate - 54 Year Historical Chart | MacroTrends
Basis Trading
Basis trading has become a primary yield-generating method for some stablecoins. The strategy exploits price differences between the spot and futures markets for cryptocurrencies, typically by buying in the spot market and selling short in the futures market.
The yields on basis trades can vary widely, influenced by market sentiment, trading volume, and overall cryptocurrency market conditions. During a "bull market" or period of high optimism, increased demand for leverage in the futures market could widen the basis, potentially increasing the yield. Whereas a "bear market" or period of uncertainty could narrow the basis or even turn negative, potentially reducing or eliminating the yield.
Ethena's USDe is a typical example of using basis trading to generate income. Previously, the yield of sUSDe was as high as 113%, but as the market cooled, this figure has now stabilized at around 12%.
Source: Basis Trading TVL Ranking - DefiLlama
Stablecoin Use Cases
Based on the above Ethena business model and the various risk factors in the stablecoin space, how can new stablecoin issuers position themselves to take advantage of the market’s potential? There are roughly three use cases: settlement tokens in transactions, collateral in money markets, and payments (huge potential but currently limited).
There is no doubt that the main use case of stablecoins is to act as settlement tokens when trading. Taking Tether as an example, more than 33% of the USDT supply is held by centralized exchanges (CEX).
Ethena has also increased the liquidity and accessibility of USDe by establishing partnerships with major exchanges such as Bybit and Infinex, positioning USDe as trading collateral on CEX.
This strategy can also enhance the utility of native tokens in some stablecoin projects, such as Ethena’s native token ENA, which is similar to BNB in the Binance ecosystem. ENA can provide reduced trading fees on partner exchanges, governance rights, staking rewards, and exclusive features. The recently passed Ethereal proposal proposes to allocate 15% of the potential future token supply to ENA holders, further consolidating its role in the ecosystem.
Stablecoins are ideal collateral for lending protocols in the DeFi ecosystem as they minimize the risk of liquidation due to price volatility.
In addition, the use of stablecoins for payments is a huge potential growth area. Although it currently faces challenges and is limited by many factors, such as regulatory uncertainty and low merchant acceptance, it can also provide multiple advantages to the payment field, including faster settlement times, lower transaction costs (especially cross-border payments) and 24/7 availability.
Recent developments, such as fintech company Stripe’s announcement to accept stablecoin payments, indicate a growing interest among traditional payment processors in integrating stablecoins into their systems. Given that Stripe is on track to surpass $1 trillion in total payment volume in 2023, if stablecoins can capture a portion of that transaction share, the potential is enormous.
Summarize
The stablecoin market appears to be undergoing a transformation, with new players entering the space and existing players expanding their product offerings. Recent data shows that the circulating supply of stablecoins has reached an all-time high, indicating that stablecoin adoption is increasing across a variety of sectors.
Although emerging stablecoin projects face high barriers to entry, the market demand for yield-generating stablecoins with sufficient liquidity is not met. Ethena may be the most dazzling one at this stage, but it has the potential to become
