Synthetic Stablecoin USDe: Seeking Balance Between DeFi and CeFi

USDe is a new type of crypto-native synthetic dollar stablecoin, designed with a structured passive income product that lies between centralized and decentralized structures. It stores assets on-chain and maintains stability through a Delta-neutral strategy while earning returns for users.

The background of the birth of USDe is that the stablecoin market has long been dominated by centralized stablecoins like USDT and USDC, while the collateral of the decentralized stablecoin DAI has gradually become centralized, and algorithmic stablecoins like UST collapsed after rapid growth. Ethena seeks to find a compromise and balance between the DeFi and CeFi markets.

Mechanism of USDe

1. Users can mint USDe at a 1:1 ratio by depositing stETH. The deposited stETH will be sent to a third-party custodian.

2. Map the asset balance to the exchange through the "off-chain settlement" (OES) method.

3. Ethena then opens a short perpetual contract position for ETH on the exchange, ensuring that the collateral value remains delta neutral or unchanged in USD terms.

4. Ordinary users can obtain USDe from external liquidity pools, while institutions that have completed KYC/KYB can directly mint and redeem USDe through contracts.

5. Assets are always held in a transparent on-chain custody address, without relying on traditional banking infrastructure, reducing the risks of exchange fund misappropriation, bankruptcy, and so on.

OES Custody Model

OES( off-chain settlement ) is a type of capital off-exchange custody settlement method that balances on-chain transparency and the use of funds by centralized exchanges:

• Use MPC technology to build custody addresses, keeping user assets on-chain, maintaining transparency and decentralization.
• Addresses are jointly managed by users and custodians to reduce counterparty risk.
• OES providers collaborate with exchanges to map asset balances to the exchanges for trading and financial services.

Source of Income

The yield of USDe mainly comes from two aspects:

1. Ethereum staking rewards brought by ETH liquidity derivatives.
2. The funding fee income obtained from opening a short position on the exchange and the basis trading income.

The funding rate is based on the difference between the spot price and the perpetual contract market, paid periodically to traders holding long or short positions. The basis refers to the deviation between spot and futures prices, and as the futures contract approaches expiration, the futures price typically converges towards the spot price.

Yield and Sustainability

Recently, the annualized yield of the protocol has reached up to 35%, with the yield allocated to sUSDe reaching 62%. This high yield is partially due to the fact that USDe is not entirely staked as sUSDe, allowing the actual staked sUSDe to earn higher returns.

However, as the market cools down, the long positions in exchanges decrease, and the funding rate income also declines. After April, the overall yield significantly decreased, with Protocol Yield dropping to 2% and sUSDe Yield dropping to 4%.

The yield of USDe is more reliant on the situation of the futures contract market of centralized exchanges, constrained by the scale of the futures market. When the issuance of USDe exceeds the capacity of the corresponding futures market, it will limit its further expansion.

Scalability Analysis

The scalability of USDe is mainly restricted by the open interest of the ETH perpetual market (Open Interest). The current ETH Open Interest is about 12 billion USD, while BTC is about 30 billion USD. The issuance of USDe is approximately 2.3 billion USD, ranking 5th in the stablecoin market by market capitalization.

Expanding the market capitalization of USD requires increasing corresponding short positions in the existing market, which may pose challenges to the current market. Over-issuance may lead to a decrease in funding rates or even turn negative, affecting the protocol's yield.

The scalability of USDe is closely related to the size of the perpetual market. Under bullish sentiment, the theoretical capacity of USDe may increase; under bearish sentiment, it may decrease. Overall, USDe may become a high-yield stablecoin with limited short-term scale and long-term alignment with market trends.

Risk Analysis

1. Funding rate risk: Insufficient market bulls or excessive issuance of USD may lead to negative funding rates.

2. Custody Risk: Relying on OES and centralized institution services presents a theoretical possibility of funds being stolen.

3. Liquidity risk: Large amounts of funds may face insufficient liquidity during market stress.

4. Asset anchoring risk: The anchoring relationship between stETH and ETH may experience temporary decoupling.

To address these risks, Ethena has established an insurance fund, with funding sourced from a portion of the protocol's revenue distribution.