Centralized stablecoins like USDC and USDT maintain their value by holding fiat reserves but come with custodial risks and reliance on traditional financial institutions. Decentralized stablecoins, on the other hand, aim to avoid these dependencies but often struggle with scalability, liquidity, and maintaining price stability.
Ethena (ENA) introduces a new solution with USDe, a synthetic dollar designed specifically for the decentralized finance (DeFi) space. Unlike traditional stablecoins, USDe does not rely on fiat reserves, instead using crypto-backed mechanisms to maintain stability while remaining censorship-resistant.
What is Ethena (ENA)?
Ethena represents a new approach to stablecoins in DeFi. It offers a synthetic dollar—known as USDe—designed for stability without relying on traditional fiat reserves.
Ethena leverages Ethereum’s proof-of-stake (PoS) blockchain and aims to address limitations in existing stablecoin models by providing a decentralized, censorship-resistant stablecoin backed by cryptocurrency assets.
How Does Ethena Work?
Ethena uses a combination of financial strategies and blockchain incentives to maintain the stability of USDe while offering yield-generation opportunities for users.
Delta Hedging for Stability
One of Ethena’s core mechanisms is delta hedging, a risk management strategy used to counteract fluctuations in the value of its underlying crypto assets.
Delta hedging involves adjusting short positions on Ethereum derivatives across third-party platforms. This balances risk exposure, ensuring that even if the value of crypto collateral changes, USDe remains stable.
In short, Delta hedging is like having a backup plan to protect against price movements. Here’s how it works in simple terms:
- Imagine you hold an asset whose value increases when the Ethereum (ETH) price rises.
- To offset potential losses if ETH falls, you take a short position (betting ETH will go down) on a derivatives platform.
- If ETH drops in value, your short position gains, balancing out the loss. If ETH rises, the short position loses value, but your original holdings increase in worth.
By continuously adjusting these positions, Ethena keeps USDe’s value stable, maintaining its peg close to one U.S. dollar. However, delta hedging is not risk-free:
- Frequent rebalancing incurs transaction fees, affecting overall returns.
- Market conditions can shift rapidly, requiring constant monitoring.
- No system is completely immune to volatility, meaning additional risk management strategies are necessary.
Staking and Yield Generation
Ethena also incorporates staking and yield-generation mechanisms to incentivize user participation and ensure the protocol’s sustainability.
Its yield model relies on two primary sources:
- Ethereum Staking Rewards – The protocol stakes ETH to earn consensus rewards from Ethereum’s proof-of-stake network.
- Derivatives-Based Funding – Revenue is generated through the delta hedging process, capturing funding rates from derivatives positions.
USDe holders can stake their tokens within the Ethena protocol to earn rewards. This staking process serves multiple purposes, like encouraging long-term participation and reinforcing the stability of the ecosystem.
It also provides a passive income opportunity, allowing users to earn yield from the protocol’s operations. Moreover, the protocol distributes some of the generated rewards to users, aligning incentives within the ecosystem.
What is USDe and How Does it Work?
As mentioned, USDe is a “synthetic dollar” —a dollar-pegged asset backed by crypto collateral instead of traditional bank reserves.
How Does Ethena Generate Yield for USDe?
Ethena provides a transparent way for users to earn yield on their USDe holdings, which helps make it a more attractive option in the DeFi space. Here’s how you can do it:
- Staking and Earning with sUSDe:
you can stake your USDe and receive an asset called sUSDe in return. This represents your share in the Ethena staking pool. As the pool grows, so does the value of sUSDe, and you can exchange it back to the stablecoin whenever you decide to withdraw. This staking setup has consistently provided returns of over 10% per year, giving you a way to earn while holding your stable assets.
- Profiting from Market Mechanics:
Ethena also generates returns by exploiting funding rates in perpetual futures markets. In this market, long positions usually pay short positions, which means the protocol can profit from these payments. This process and staking ETH for rewards add to your total yield as a USDe holder.
Benefits of Using USDe
We can highlight the benefits of USDe as follows:
- Accessible yield opportunities: With USDe, you can stake your assets and earn a stable yield that has remained above 10% annually. This offers an attractive, reliable income stream for users in the DeFi ecosystem.
- Scalability to meet demand: Ethena is built to expand based on the demand for USDe. By using major crypto markets to back the asset, the protocol can scale up quickly as needed. Plans are to use Bitcoin’s deep liquidity to increase capacity even further. This means the stablecoin can more easily adapt to changing market needs.
- Censorship-resistant structure: USDe avoids risks associated with traditional financial institutions. It’s backed by crypto assets rather than funds held in banks. The assets are managed through crypto-specialized custodians, providing a more decentralized and resilient system.
USDe vs. Terra’s UST: Key Differences
USDe and Terra’s UST sought to maintain a stable value but approached it differently. Terra’s UST used a dual token system, relying on its partner token, LUNA, to keep the value of UST stable. This method worked only as long as the LUNA token’s price held steady. When LUNA’s value dropped sharply, UST also crashed.
According to Ethena, USDe is directly backed by assets like Bitcoin (BTC) and Ether (ETH) through short positions on these assets.
This 1:1 backing means that for every USDe in circulation, an equal amount of crypto collateral is held. the stablecoin’s approach reduces the risk of a sudden drop in value, as it doesn’t depend on a linked token’s price (as UST did).
Potential Risks with USDe
Although USDe is designed to provide stability, its value depends on crypto market dynamics and the availability of futures platforms for hedging. Maintaining its stable value in highly volatile markets could become more challenging, especially if the crypto collateral faces sharp price drops.
So, to wrap up, USDe has so far offered a different kind of stablecoin, designed with decentralized principles in mind and backed by crypto assets rather than fiat.
ENA Token: Tokenomics and Utility
ENA is the governance and utility token for Ethena. It underpins the platform’s decentralized ecosystem by enabling decision-making, encouraging participation, and fostering engagement.
Governance and Influence
As Ethena’s governance token, ENA empowers holders with voting rights to influence the protocol’s development. Participants can vote on vital decisions, such as:
- Setting risk management guidelines
- Choosing asset compositions for USDe backing
- Approving partnerships or integrations
This structure ensures the community has a stake in Ethena’s direction and long-term sustainability.
ENA Use cases
ENA’s design incentivizes active involvement in the ecosystem, such as:
- Staking Rewards: ENA stakers receive rewards, promoting long-term holding.
- Liquidity Provision: Holders can earn additional incentives by providing liquidity, especially in PT-ENA pools on platforms like Pendle Finance.
- Security for Cross-Chain Transfers: Restaked ENA bolsters cross-chain security for USDe transfers via LayerZero’s DVN network.
ENA is available on major centralized exchanges like Binance, KuCoin, and Bybit and decentralized options like Uniswap.
Tokenomics and Circulation
ENA’s total supply is capped at 15 billion tokens, with distribution as follows:
- 30% for ecosystem development
- 20% for investors
- 15% for the Ethena Foundation
- 30% to core contributors
ENA Airdrop
In April 2024, Ethena distributed 5% of its native ENA tokens to early contributors and Shards campaign participants, fostering engagement within its ecosystem. The Shards campaign enhanced liquidity and incentivized early adopters, establishing ENA pools on platforms like Curve and Pendle Finance.
The project is in its third season, which will run for six months and end on March 23rd, 2025.
Frequently Asked Questions
How does Ethena USDe maintain its peg to the U.S. dollar?
Ethena USDe maintains its peg to the U.S. dollar through delta-neutral hedging, a risk management technique that offsets the price risk of its backing assets.
Instead of relying on traditional fiat collateralization, the protocol takes short perpetual futures positions equivalent to the value of its holdings. This strategy neutralizes price volatility, allowing USDe to remain stable without direct fiat reserves.
What are the use cases of Ethena USDe?
USDe has multiple use cases. It can be minted or redeemed for liquidity management and staked to earn rewards. Additionally, it functions as a medium of exchange in DeFi applications, including lending, trading, and payments. Traders can also use it for cash and carry trades, exploiting differences between spot and futures prices to generate returns.
How does Ethena USDe differ from traditional stablecoins like USDC or Tether?
USDe is backed by crypto-native mechanisms such as delta hedging and on-chain custody. This design makes it more scalable and censorship-resistant but also introduces different risks, particularly those related to crypto market volatility and derivatives-based stability mechanisms.
