Wu talks about blockchain Wu talks about Real 2024-05-14 09:02 Shandong
Author | Ethena
Compiled by GaryMa Wu Says Blockchain The content of this article does not represent the views of Wu Says Blockchain
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Summary
This article aims to outline Ethena’s roadmap and unified vision for the coming months.
i) Why we think Ethena is important
ii) What we are excited about: The integration of USDe with DeFi, CeFi, and TradFi
iii) Ethena’s ultimate goal: currency, network, and transaction
Why is Ethena important?
The holy grail of cryptocurrency has always been to achieve currency status.
Originally conceived as a peer-to-peer electronic currency, Bitcoin has evolved over time into a narrower, more simplified value proposition: a digital store of wealth.
Next, Ethereum realized the vision of a programmable smart contract platform and decentralized applications. Over time, various iterations of Ethereum’s monetary policy have seen the value proposition of ETH as an asset converge again to its use as a currency.
As we continue to create more infrastructure layers, the vast majority of which are completely virtual products that cannot justify their valuations through any metric of fee generation, time and again, valuations are once again tied to the likelihood that these tokens can become money in the native economy of the empty block space.
While they each have different value propositions, and the narratives we collectively develop about each asset, the fact is that while Bitcoin, Ethereum, and your favorite infrastructure layer all exhibit some narrow characteristics of money, the lifeblood of transactions within the crypto capital markets is conducted in digital dollars.
All data on cryptocurrency-related transaction volumes, both on-chain and on centralized exchanges, confirms this reality: stablecoins and USD-pegged assets are digital currencies, and everything else is competing for the weaker position of becoming a digital store of wealth.
Rather than viewing the world according to our biases about how we wish it to be, perhaps it is better to view it according to how it actually is.
Perhaps the greatest irony is that the most important practical application of cryptocurrency, a system that intends to disrupt existing monetary power structures, is the storage, movement, and transfer of value of digital dollars.
Like it or not, and whether or not it matches your idealized vision of cryptocurrency, digital dollars are actually being used as money.
However, we have yet to find a native currency that is suitable for us and is decoupled from the traditional system and independent.
So, why is Ethena important?
If you believe:
● Money use case is the holy grail
● The addressable market for the currency is the largest among cryptocurrencies
● The killer app for cryptocurrency is our own native form of money
It stands to reason, then, that creating our own form of money is one of the most important tasks, if not the most important.
Maybe you don’t agree, and that’s okay.
There’s a good chance we won’t succeed, and that’s okay.
But we do think it's important, and that's why we're here.
What are we excited about? The convergence of DeFi, CeFi, and TradFi
In 2014, Tether changed the history of CeFi forever.
In 2017, MakerDAO changed the face of DeFi forever.
In 2024, we believe Ethena will reshape and drive the integration of DeFi, CeFi, and TradFi:
1. DeFi
2. CeFi
3. TradFi
With USDe as the link connecting them all.
1. DeFi: Internet bond collateral
I first met Kain from Synthetix after Ethena closed its seed round. Unfortunately, Kain missed the presentation in his inbox. He sat down and outlined all the ways he wanted to help me; about where the product might go, how it fits into the rest of DeFi, which other builders I should talk to to iterate on this idea, and what it might mean to bring new dollar primitives on-chain at scale.
At the end of breakfast, I asked him why he was helping Ethena with zero financial exposure. He responded, “I think this is probably one of the most important new developments in DeFi, and I just want to see DeFi win.”
How can DeFi win?
The dollar is the lifeblood of every major primitive in DeFi, and producing dollars is the best business model in crypto. That’s why you can see almost every major DeFi application expanding into the dollar issuance vertical.
If we examine each of the core primitives in DeFi and where Ethena is embedded:
sUSDe as collateral in money markets
Prior to Ethena’s listing, the only meaningful use cases for money markets were directional leverage on WBTC or ETH, or leverage on yield generated by staking on stETH. The introduction of a new scalable USD-denominated asset with structurally higher market yields that is also completely exogenous to DeFi provides a new use case for money markets, providing cheap USD borrow leverage for cash-out trades in CeFi. Funding CeFi perpetual markets from DeFi borrowing is a multi-billion dollar opportunity that will force interest rate convergence between the two markets. We’ve seen every major money market in DeFi take quick steps to recognize this, including Aave, Curve, Maker (via Spark), Ajna, and Morpho, where USDe has become the fastest growing USD collateral asset.
sUSDe as margin collateral in perpetual DEX
Ethena-related hedging volume alone accounts for over 2x the total open interest across all perpetual DEXs. The liquidity associated with USDe hedging will easily double the size of any DEX market that the Ethena protocol chooses to deploy. Even more interesting is that every DEX uses USD as collateral. By combining USDe as margin collateral with the yield embedded via sUSDe, capital efficiency and returns can be significantly improved, and the basis of CEX platforms can be used to offset trading fees on DEXs. Ethena can provide valuable one-way non-toxic liquidity to these platforms while embedding USDe as a collateral asset. Deeper liquidity, higher open interest, and reduced funding costs will help kickstart a positive cycle of healthy growth and expand the addressable market of perpetual DEXs by an order of magnitude.
sUSDe as the backend infrastructure for stablecoin issuers
Since Ethena USDe was listed, it has become the fastest growing USD-denominated asset in the history of cryptocurrencies. Producing structurally higher economic returns on USD-denominated assets is one of the strongest moats for any product in cryptocurrencies. There are 3 viable sources of potential returns for stablecoin issuers, in the billions of dollars, for their collateral backing:
i) RWA income
ii) Overcollateralized lending on BTC and ETH
iii) Perpetual Funding Fees in Perpetual Futures and Futures Basis
Unlike issuers like MakerDAO and Frax that offer competing products, Ethena serves as the neutral infrastructure behind these protocols, which can choose to back it with USDe. This provides these protocols with a source of returns at a massive scale that was previously unavailable - both protocols have announced allocations of up to $1.25 billion to USDe. As other stablecoin issuers grow and proliferate in DeFi, Ethena will scale with them.
sUSDe as the underlying asset for interest rate swaps
Pendle’s growth this year has unlocked a new primitive for interest rate swaps within DeFi. So far, much of this volume has been focused on speculating on points on pre-token projects, but once Ethena is accepted, this will unlock the first scalable yield-based USD instrument to build interest rate curves. Interest rate swaps are in very early stages of development, but sUSDe provides the underlying asset to unlock the largest real yield in crypto: the basis of staking ETH and centralized futures markets. The basis of futures markets is the largest real yield in crypto. Therefore, USDe will be the core primitive for building these interest rate markets.
USDe as a currency in AMM DEX
On any given day, 3 of the 4 most traded assets on-chain are USD-denominated. Likewise, the digital dollar is the objectively most important asset in both on-chain and external spot markets. As USDe becomes one of the most liquid assets on-chain, it will continue to circulate as a currency in trading pairs of spot assets in DEXs.
In short, every important DeFi primitive is backed by the US dollar. We believe USDe is an ideal crypto-dollar construction that can provide a base layer asset for other financial applications. In its short history, USDe has become one of the most widely integrated assets in DeFi.
2. Tether’s Privileges: Currency in CeFi
Tether isn’t just one of the greatest businesses in cryptocurrency. It’s also one of the best businesses ever created, regardless of circumstances.
What is their strongest moat?
USDT is the de facto currency on centralized exchanges. The most liquid BTC and ETH trading pairs on the largest exchanges are USDT. Importantly, the most traded instrument in crypto, perpetual swaps, are primarily leveraged and settled on USDT.
Centralized exchanges are also the only viable distribution channel at scale. I don’t think we have over 1,000,000 real users actively participating on-chain, and the largest exchanges hold the keys for over 100,000,000 users.
Every major stablecoin success story is closely tied to distribution through exchanges. However, these relationships are often pressured by political and competitive economic dynamics between issuers and distributors.
While Ethena and USDe initially started on DeFi chains, the bigger opportunity is to provide a neutral USD infrastructure on every major centralized exchange to be used as currency.
As Arthur outlines in his article, it is important that Ethena is not owned or built by a single centralized exchange. Ethena needs to be widely owned as a neutral infrastructure in the space, and by doing so, can help power all of these venues with USDe, rather than just one venue alone.
Embedding USDe as a currency for spot trading pairs and integration with Ethena unlocks yield collateral for the $20 billion of perpetual contracts currently collateralized in USD and represents one of the largest growth opportunities in USD-based “yield” products.
3. Final Boss: USD Earnings in TradFi
The fixed income market is the world's largest liquid investment class at over $130 trillion. The majority of sovereign wealth, pension funds and insurance pools are in fixed income products. The world's most important financial instrument for preserving and protecting wealth is simply the U.S. dollar with a yield. It sounds simple, but the demand for this product is orders of magnitude larger than the entire cryptocurrency market.
What is unique about the revenue generated by Ethena is:
i) It combines the real returns native to two billion-dollar cryptocurrencies
ii) Yields show a weak negative correlation with exchange rates in traditional finance
iii) The underlying backing is in the hands of custodians that traditional finance can insure
Packaging scalable crypto-native yield sources into a USD-like product provides these allocators with an easy way to access and leverage the excess yield of crypto in a single asset. When viewed within their existing fixed income portfolio, USD-denominated USD generated >20% of unfunded profits last year, which is unprecedented.
Most interestingly, when real rates eventually decline, speculation in cryptocurrencies will increase, along with a longer-term demand for leverage, which will increase the yield generated by Ethena. As the benchmark rate for RWAs declines, Ethena becomes more interesting from a risk-adjusted perspective to offset lower real rates on traditional fixed income products.
This feature is one of the most important reasons why hundreds of billions of dollars of TradFi entities are investing in the Ethena ecosystem.
RWAs will never be a category that brings meaningful new capital to crypto.
Why would TradFi put dollars into crypto-ified Treasuries on-chain, with shell entities in the Cayman Islands, with all the added fees, operational risk, smart contract risk, and regulatory risk, instead of accessing them directly?
However, the higher risk-adjusted dollar yields generated by cryptocurrency-native sources are a product that will bring billions of dollars of capital from the old system to the Internet system.
Although the core product is a synthetic dollar, Ethena can also be seen as an interest rate arbitrage tool that promotes the convergence of different interest rates between DeFi, CeFi, and TradFi, and USDe is just a balancing factor that unifies them.
Beyond USDe: Ethena’s Ultimate Goal
What would it take to create a $100 billion business or protocol in crypto?
First, you need to be a leader, and you have three categories to choose from:
i) Currency: BTC and ETH
ii) Network: ETH and SOL (2021 valuation)
iii) Exchanges: Binance and Coinbase (2021 valuations)
Ethena’s ultimate goal spans all three categories.
i) Currency: USDe
The summary section above outlines why we believe USDe is our best opportunity to create our own currency. This has always been the ultimate guiding vision of Ethena.
Development is currently underway on two additional initiatives that will build on and support USDe’s growth.
ii) Network: Unified Currency Layer
Once you create the currency, you now have the most powerful product in cryptocurrency, the killer app.
The natural extension of this core product is to build an economy and network on top of it.
Most base layer infrastructure starts as a platform and then tries to attract applications and their users.
We believe this order is not optimal.
Why?
Ethena started with a killer product for money. This core product provides the lifeblood asset for other financial applications to build on, many of which have already integrated with USDe and benefited from its existence.
With USDe as the fulcrum asset, these applications can integrate and combine in a base layer optimized for monetary and financial use cases. As we have outlined, we believe the native yield dollar is the single most important asset on which other financial applications are built.
For users, the digital dollar is also the only product that every participant in the crypto world uses every day, and the only product that cryptocurrency offers to the rest of the world with indisputable product-market fit.
In less than 3 months, Ethena alone has attracted enough USD-denominated TVL to rank it 6th among any existing chain, many of which have been around for several years.
How do we get a billion users on-chain?
Well, the target address market for the programmable dollar is the entire world.
When you make that dollar more useful, more composable, and with the best risk-adjusted return, the world will eventually realize it, too.
Ethena starts with a killer product for currency, and then a new Internet economic and financial system will be built on it.
iii) Trading: Aggregated Liquidity Layer
Ethena holds a unique position in the crypto capital markets.
While USDe has already had a significant impact on DeFi across major applications, we have yet to see the second-order impact of the liquidity that Ethena sits on and the liquidity it could unlock for existing and new exchanges.
What is not widely understood at this point is how Ethena will eventually transition to being one of the liquidity pools like other CEXs and DEXs.
Specifically, the existing support and related hedging flows behind USDe can achieve:
i) A liquidity aggregation layer that sits alongside our existing centralized and decentralized exchange partners to support deeper liquidity on their venues
ii) Bootstrapping new incubated decentralized exchanges on the Ethena network
Just as USDe is positioned as neutral infrastructure across DeFi and CeFi platforms, the support behind USDe can also be conceptualized as a large inventory pool of spot collateral and perpetual bonds that can support other exchange venues through an aggregated exchange liquidity layer.
At any given time, Ethena knows where it wants to buy or sell spot, and where it wants to buy or sell perpetuals. This can be aggregated across all major exchanges, where Ethena’s balance sheet will provide one of the deepest order books and OTC pools across the spot and derivatives space, with Ethena itself being the largest counterparty to external buyers.
Having the ability to support flows for launching new DEXs on the Ethena network will also allow Ethena to immediately solve the cold start problem for new DEXs building base layer networks.
The liquidity cold start problem is the most challenging obstacle for decentralized exchanges to begin to compete meaningfully.
Liquidity is one of the few differentiating qualities of any exchange and the only real moat that existing exchanges currently have. In less than 3 months, Ethena is now the largest counterparty among centralized exchanges, 2x larger than the entire DEX space combined.
Traffic associated with Ethena is already the most significant of any entity in the space, and at this scale will be the determining factor behind which venues thrive and which ones perish.
Ethena is uniquely positioned to provide solutions to support the growth of new venues on its network.
Just as USDe benefits from being a neutral infrastructure in DeFi and CeFi, rather than directly competing, the Ethena transaction layer will sit in a similar position to USDe:
i) Support existing partner venues and build an aggregation layer between them
ii) Support the growth of new venues on the Ethena network. The larger USDe grows, the lower the USD capital cost of cryptocurrencies. The larger Ethena scales, the greater the depth and liquidity of all venues.
This is how we win together, syllogism:
● Currency
● Network
● Trading
