How Ethena’s Stablecoin Broke Crypto History As Fastest to Hit $3 Billion

Ethena Labs founder Guy Young explains how USDe is built different

By: Zack Guzman

June 4, 2024

Even by crypto standards, Ethena Labs is turning heads. 

The crypto project just broke history after its synthetic dollar (stablecoin) broke the $3 billion mark in record time. In fact, Ethena’s USDe did so in just four months after its public launch. By comparison, it took Terra’s algorithmic stablecoin, UST, nearly a year to accomplish the same feat — and everyone knows about the record implosion that ended it. 

To dig into the critical differences and similarities between Ethena’s attempt at a digital dollar and Terra’s well-documented $40-billion failure, I caught up with Ethena Labs founder Guy Young for an exclusive Coinage interview.

According to Young, Ethena is just getting started — with hopes for its futures-backed stablecoin to see its market cap double again within the next six months. As a project boasting 33% yield on deposits, that seems entirely possible. It might also sound terrifying.

As someone who lived and covered the Terra collapse intimately, there are striking similarities that are unavoidable with what Ethena is attempting to do: Create a digital asset that seeks to “always” trade at a dollar, don’t have it be backed by dollars or assets held in a bank, attract deposits by boasting a yield that is roughly five-times what you might be able to get elsewhere, and establish an insurance fund for when things might not pan out as planned.

That said, as similar as the mission might sound to Terra’s – it would also be extremely lazy journalism to cast USDe off as a UST copycat. As we’ll discuss, there are entirely different mechanics at play. There are also similar risks to consider. Nonetheless, Young didn’t back down from discussing them. As he tells me, it’d be more alarming not to.

“After what we saw last cycle for people to ask these questions — if we didn't, I think that that would be more worrying,” he said.

Backing (Digital) Dollars Without Dollars

Let’s start with what makes Ethena’s synthetic dollar unique. Unlike the leading stablecoins, Tether and USDC, USDe is not backed by assets held in a bank. The digital dollar is backed by futures positions taken out at the time money is put into the project. Currently, users can “mint” USDe by depositing bitcoin, ethereum, and ether-based liquid staking tokens. At the same time, Ethena opens corresponding short perpetual positions for the approximate same notional dollar value on a derivatives exchange. In that sense, they are said to be “delta-neutral,” meaning things are hedged regardless of where underlying spot prices wind up trading.

By doing so, Young points out that Ethena delivers on the mission of differentiating substantially from other stablecoins, like USDC, which can run into trouble if the banks they are using to custody assets with ever run into issues — just as Silicon Valley Bank did in 2023. USDC’s issuer, Circle, held assets at SVB and when the bank appeared on the edge of failure in 2023, depositors panicked, and USDC’s market cap has not recovered since.

“I think what we learned that weekend was that we couldn't have our entire system sort of relying on the US banking system,” Young said. “There is some value in basically creating diversification away from that custodial risk, and so in essence, all we're doing is just really replacing the custodial risk of assets sitting outside of our own ecosystem to one that's sitting within it.”

Then again, no one ever really argued Terra didn’t deliver on that mission. Custody wasn’t necessarily the issue so much as it was that the asset that was supposed to remain stable at a dollar, failed to deliver on its promise. Can Ethena do better?

As Young points out, Terra’s algorithmic stablecoin always faced the risk of a “bank run” should holders seek to redeem their tokens. That stemmed from Terra’s corresponding token, LUNA, essentially serving as collateral. Ethena is not structured in the same way — nor does it necessarily directly control the interest rate it’s marketing for deposits in the same fashion Terra’s Anchor protocol promised a 20% yield.

Instead, USDe’s yield stems from exogenous market dynamics. That is, people seeking exposure to long-term futures bets in bull markets often pay up for it. For example, funding rates on bitcoin and ether perpetuals are currently positive, which means long positions pay short positions, generating a return for those betting against prices going higher in the future. In that sense, things are fine for Ethena’s yield — as long as that stays constant. When that starts to change, yields deteriorate as unwinding positions can get more expensive.

“I think that's actually the biggest point to actually highlight here,” Young said, noting that yields swung from as high as 30% to 50% to just 10% back in April. “The yield here is completely variable… and if it's going to be high, then great, I think it will grow and if it's going to be low, then the thing is going to shrink to a size that sort of makes sense.”

Risks to Consider

In weighing risks, it’s important for people to consider the upside of yields with the downside of loss. As was the case with Terra, high yields attracted many users who may not have considered the latter. Behaviorally, sometimes it’s considerably harder to calculate the percentage change of things breaking or collapsing — and even harder to follow a plan when you’re thrown into chaos.

For Ethena, its plan to deal with chaos looks pretty similar to Terra’s emergency plan. Ethena boasts an insurance fund to cover when funding rates might flip negative and stay that way for a while. In theory, Ethena would be able to close down certain positions – but as the project grows to control a larger and larger piece of the derivatives market, it can be trickier to find willing people to take the other side of a trade. In moments of market distress, spreads typically widen, trades become harder to execute – and in crypto, where there is no central bank to stabilize markets, things can easily go from bad to worse.

As Coinage’s award-winning reporting on Terra’s collapse showed, the project had sought to build a defense fund in the event a bank run were to happen. In the end, that defense fund of billions of dollars in Bitcoin proved futile. Ethena has so far stacked up more than $40 million in a fund of similar intent. Depending on market conditions, that could buffer problems for months or weeks.

“The very basic idea here is when times are good and the yield is so excessive to the upside, you're clipping a bit of the yield and putting it in a rainy day fund,” Young explained. “And then to the extent that funding comes down and the yields are less attractive, you can sort of tap into that when times aren't as good.”

Ethena’s governance token ENA, which importantly isn’t directly built into USDe’s mechanics, is up about 50% on the year so far. Despite some of the parallels to Terra’s prior attempt, the synthetic dollar continues to attract capital at a record clip. Young says he expects most of that adoption to continue from crypto-native users as USDe gets added as collateral to trading platforms. In May, Bybit added the stablecoin as an option for bitcoin and ether spot trades. Expanding beyond crypto platforms might be difficult given some of the remaining Terra hangover. For now, Young isn’t afraid to take those skeptics on.    

“I want to have these discussions so that people are at least aware of the type of products that they're walking into. And that's sort of the most important thing from my side, which is, treat people like adults,” he said. “They can make risk decisions by themselves. I think it's one of the more beautiful things about crypto is that it sort of enables you to make those decisions.”

Coinage members can watch our full interview with Ethena Labs founder Guy Young above. To support our community-owned outlet, own it with us, and unlock other exclusive benefits, mint one of our Membership Passes today! Chat with Coinage in our Discord


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