Before we get started, this is not a recommendation or endorsement to buy any token(s) mentioned.
This week, we cover the mainnet launch of Ethena–the new protocol powering a delta-neutral synthetic dollar USDe, backed by ETH staking yield and automated, programmatic delta-neutral hedges.
USDe represents a crypto-native stablecoin made possible by long term ETH LST yield combined with the fees earned for shorting ETH on centralized and decentralized perps exchanges.
As DeFi attempts to create a new parallel financial system, stablecoins are the most important financial instrument but they remain tethered to, and reliant upon the dollar and the related banking system.
Ethena is aiming to provide a more scalable crypto-native form of money to power DeFi by introducing a dollar denominated savings instrument in USDe, a basic product we can all enjoy permissionless access to on-chain.
The current USDe yield, a weekly average of funding yield and LST yield divided by staked USDe supply, annualized with weekly compounding is a staggering 27%! By now, you’re probably wondering how on earth are they generating 27% APY?!
The yield originates from two places:
- Staked ETH yield
- Funding and basis spread earned from the delta hedging derivatives positions from shorting ETH
When minters deposit stETH to mint USDe, Ethena Labs opens corresponding short derivatives positions to hedge the delta of the received assets. Historically, there has been a positive funding rate and basis spread earned by participants who are short this delta exposure.
While this earned rate varies, in 2021 it yielded 18%, in 2022 -0.6%, and in 2023 7% APY on a volume-weighted basis.
Here’s more detail on how Ethena USDe works under the hood:
- The user requests to mint USDe by selecting a backing asset, such as stETH, entering the amount of stETH they wish to use for minting, and viewing the amount of USDe to to receive.
- If the user agrees with the amount of USDe, the user is able to click the “Mint” button which triggers an EIP712-style signature specifying the backing asset, backing amount, and USDe amount they will receive.
- After the user signs the transaction with their wallet, Ethena validates the request and submits the transaction to the blockchain.
- Upon successful confirmation of the transaction, the user’s chosen backing asset, such as stETH, is atomically swapped for the agreed amount of USDe.
On February 19th, Ethena announced its Shard campaign is live, marking USDe’s official launch to the public. Shards will represent and track how much a user has contributed to Ethena’s ecosystem over the course of the campaign.
This campaign is expected to last as little as 3 months where the first epoch will focus on liquidity for USDe Curve pools. The remaining epochs will center on actions such as minting with different stablecoins, using USDe on money markets, liquidity provision on other venues, bridging to yield focused L2s, holding certain governance tokens and more.
Participants will receive less rewards as the program takes place, so being early will result in the highest number of Shards awarded. As of this writing, the few ways to earn “shards” aka points are below.
As of this writing, 5 of 8 LPs have reached their capacity (Lock Limit) with a total supply of $331.5M USDe…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
