What Is USDe: Ethena's Synthetic Dollar
Stablecoin cryptocurrencies have revolutionized the crypto market since their arrival more than ten years ago. Assets like USDT, USDC and other popular stablecoins have been instrumental in reducing the volatility of crypto trade and connecting the worlds of crypto and fiat currencies.
However, along with their advantages, most of these stablecoins have significant drawbacks and risks, including their high dependence on the traditional banking infrastructure. USD-backed assets like USDT and USDC face the critical problem of overreliance on the custody of a single, centralized issuer. Algorithmic stablecoins are inherently unstable, making them challenging to scale effectively while maintaining a stable peg. On top of that, these stablecoins usually require excessive overcollateralization.
USDe is a synthetic dollar asset issued by Ethena that doesn't suffer from these common limitations of stablecoins. Backed by delta-hedging derivatives positions on perpetual and futures markets, USDe is completely decentralized, has no single custodian and is characterized by high scalability and stability. By using delta hedging techniques for USDe's underlying backing assets, Ethena can offer a USD-pegged crypto unlike what's been available on the market so far.
Key Takeaways:
USDe is a synthetic dollar cryptocurrency with a soft peg to USD, maintained via automated delta-hedging trading operations.
USDe's stability and dollar peg are ensured through opening and closing short perpetual positions for its underlying collateral assets.
The synthetic dollar is the flagship product of Ethena, an Ethereum-based DeFi app.
What Is USDe?
USDe is a synthetic dollar asset that maintains a soft peg to the USD through delta-hedging of its underlying assets during minting. USDe is issued by Ethena (ENA), a decentralized finance (DeFi) platform on the Ethereum blockchain. Its users can flexibly acquire, stake and liquidate their USDe holdings with 1:1 collateralization.
A number of popular high-cap cryptocurrencies, such as Bitcoin (BTC) and Ethereum (ETH), and liquid staking tokens like liquid staked Ether (stETH) can be used as collateral to mint USDe. These volatile backing assets are delta-hedged on the market to help maintain USDe's peg to the U.S. dollar. Delta hedging is a popular risk-reduction trading approach frequently used in futures and options markets. Delta hedgers reduce their investment risk by taking offsetting positions in the target asset.
In the case of USDe, Ethena opens and closes short positions for USDe's underlying assets on derivatives exchanges. When a user mints USDe by providing collateral in an underlying asset, a short perpetual position for the collateral asset is opened. Conversely, when a user decides to liquidate their USDe and redeem their collateral, Ethena closes a short perpetual position. All these position opening and closing operations are executed automatically using smart contracts.
The entire process of opening and closing perpetual futures positions is designed to maintain a stable rate for USDe against the greenback. Since USDe isn't directly backed by U.S. dollar reserves, and doesn’t act as a typical overcollateralized algorithmic stablecoin, it's referred to as a synthetic dollar asset rather than a stablecoin.
At the moment, only whitelisted users can mint and burn USDe. This is in order to protect the system's stability, and to guard against malicious actors and market manipulators.
What Is Ethena?
USDe's issuer, Ethena, is an Ethereum-based DeFi platform launched by Ethena Labs, a blockchain startup founded in 2023 by Guy Young. The protocol launched its native cryptocurrency, ENA, in early April 2024. Although Ethena's scope isn't limited to enabling USDe, the synthetic dollar asset is its flagship product, and the protocol currently heavily focuses on supporting it.
An important feature of Ethena is its use of blockchain oracles. To maintain USDe's peg stability, the protocol needs up-to-date, real-time information derived from a variety of on-chain and off-chain sources. This is achieved via external oracles that feed price data into the system.
To source external price data, Ethena uses the Pyth oracle platform, RedStone oracles and data feeds from major centralized exchanges (CEXs), including Bybit.
How Does USDe Work?
Minting and Redeeming USDe
Minting and redeeming USDe, two fundamental processes continuously executed on the platform, determine Ethena’s opening and closing of market positions. Minting is the process of creating new USDe by providing collateral. Currently, USDe can be minted by providing collateral in ETH, BTC, USDT and stETH.
Ethena's user interface and API allow whitelisted users to mint and redeem USDe.. There's no overcollateralization involved in the minting process, so users only need to pay transaction processing charges and gas fees beyond the collateral. Ethena's minting process is designed to reduce slippage, and is transparent, since users have to acknowledge the minting price (which includes a predetermined slippage range). As outlined earlier in our article, collateral funds are then used to automatically open a short perpetual position.
Although direct USDe minting via the protocol is open to whitelisted users only, the synthetic dollar is freely available to any crypto investor through external exchanges, which include decentralized exchanges (DEXs) like Curve and CEXs like Bybit.
In order to redeem USDe, an Ethena user burns their synthetic dollar holdings by sending them to a smart contract address, and receives their collateral back via atomic swap. Redeeming doesn't have to be for the full amount of the original collateral. With Ethena, you can redeem collateral in part or in full.
Staking USDe
The USDe synthetic dollar can also be used to earn staking rewards on Ethena. When a user locks their USDe funds on the protocol, they’re issued a staked USDe asset called sUSDe. This asset serves as confirmation of the stake, and is also used to accrue yield every eight hours.
USDe staking is quite flexible, and a user can unstake their funds at any time. However, staking is currently available only in certain jurisdictions. The list of countries may change, so it's always a good idea to enquire directly with the project to see if your jurisdiction is supported.
As of mid-June 2024, Ethena's USDe staking pool pays an annualized return rate of 10.1%.
Key Features of USDe
Hedging System
The stability of the Ethena ecosystem relies on its hedging system, which is used to ensure the proper balance of open and closed positions and collateral reserves. This system comprises several off-chain services, including the oracles mentioned above. Key roles of the hedging system include:
Calculating and publishing indicative prices for minting, and redeeming USDe to inform users before they proceed with key asset operations.
Applying correct pricing when users mint and redeem USDe.
Ensuring that any risks to rate stability are eliminated or controlled in real time.
The hedging system is also crucial to a secure collateral management process. Ethena uses an off-exchange settlement (OES) process to manage the custody and transfer of collateral used in automated derivatives trading. Under this OES system, custody of the underlying asset is transferred to entities external to the derivatives exchanges used by Ethena. As positions on exchanges are opened and closed, collateral movements and custody changes are closely monitored by the hedging system. This approach maintains transparency and independent verification of assets, thereby ensuring a secure and efficient ecosystem for its users.
Reserve Fund
The Ethena reserve fund, a component of the overall platform, provides additional stability and risk mitigation. Designed to hold reserves that may be used during periods of negative funding to ensure the stability of the USDe peg, the reserve fund is made up of various assets, primarily the leading stablecoins USDT, USDC and ETH. Other assets may also be used as part of the fund as determined through the platform's governance decision-making.
Where to Buy USDe
USDe is available on Bybit's Spot market through swap pairs with several leading large-cap cryptocurrencies, including BTC, ETH, SOL, USDT and USDC. As part of Bybit's campaign dedicated to the synthetic dollar, you can also enjoy zero fees on Spot trade involving USDe within these swap pairs. This offer is valid through Jul 4, 2024. The campaign also offers you the opportunity to stake up to 5,000 USDe to enjoy yields of up to 30% APR. This option is valid through Aug 3, 2024.
Advantages and Disadvantages of USDe
Benefits of USDe
By leveraging its unique trading mechanism, USDe can provide functions and utilities that most other U.S. dollar–pegged assets in the market lack. Unlike USD-reserve backed stablecoins with a centralized custodian (e.g., USDT, USDC or BUSD), USDe uses the OES custody system, a decentralized approach that ensures there's no single point of failure while offering a higher level of transparency.
USDe is also a censorship-resistant asset because it doesn’t rely on the traditional banking infrastructure that controls the emission of USD. Instead, it stores collateral on-chain in 24/7 auditable, programmatic custody account solutions. This structure enhances both the security and accessibility of the collateral that backs USDe.
The synthetic dollar also has significant advantages over algorithmic stablecoins. Probably the biggest advantage is the absence of overcollateralization requirements. Some algorithmic stablecoins, such as Dai, require ample overcollateralization to ensure stability. However, for many users, it almost defies logic to provide 150% or even more in collateral value — quite a usual requirement for algorithmic assets — in order to secure stablecoin funds.
Owing to its unique peg-maintenance mechanism, USDe is able to operate without such onerous overcollateralization requirements. In addition, this mechanism helps USDe achieve high levels of scalability, making it a useful asset for transaction and value storage within the DeFi ecosystem.
Risks of USDe
Along with its advantages, USDe carries certain risks:
Funding risk, in cases of prolonged negative funding rates
Liquidation risk, whereby exchanges might forcibly close derivatives positions when collateral values decline below minimum thresholds
Custodial risk if OES custodians used by Ethena fail
Risk of the exchanges themselves collapsing
While some of these risks are relatively low, users need to be aware of their existence and USDe’s potential susceptibility to them.
Closing Thoughts
USDe is a unique asset whose peg-maintenance mechanism is drastically different from those of popular stablecoins operating in the market.
Launched back in December 2023, the synthetic dollar has demonstrated remarkable stability, and has only deviated from its peg to the U.S. dollar by minuscule amounts (and only for very short periods). In general, USDe has demonstrated the merits of its unique peg mechanism insofar as the crypto hasn't experienced any serious depegging events. Some of this stability may be a result of the carefully guarded access to the platform, since only whitelisted market entities can directly mint and redeem USDe via Ethena.
So far, USDe has seen nothing but stability and operational success. The key question now is whether the team at Ethena is ready to make USDe minting and redeeming a public feature.
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