On February 16th, stablecoin project Ethena Labs announced the completion of a strategic round of financing worth $14 million, with a valuation of $300 million. The round was led by Dragonfly and Maelstrom, the office of BitMEX founder Arthur Hayes. In July last year, Ethena Labs completed a seed round of financing worth $6.5 million, led by Dragonfly, with participation from Deribit, Bybit, OKX, Gemini, Huobi, Arthur Hayes, and his office.
Ethena Labs’ main product is the stablecoin USDe, which is inspired by Arthur Hayes, the founder of BitMEX. In March 2023, Arthur wrote an article titled “Dust on Crust”, discussing his concept of a new generation stablecoin called “Satoshi Dollar”, which would be backed by an equal amount of BTC spot longs and futures shorts. Ethena Labs turned Arthur’s concept into reality, but chose ETH as the main asset for spot and futures positions. In other words, USDe’s collateral assets consist of an equal amount of ETH spot longs and ETH futures shorts.
Ethena Labs has received strong support from Arthur in the previous two rounds of financing, and Arthur himself has minted a large amount of USDe, even publicly stating on the X platform, “USDe will surpass USDT to become the largest USD stablecoin.”
The label of USDe is “Delta Neutral”. Delta, in finance, is an indicator used to measure the impact of underlying asset price changes on portfolio variations, with a value range from “-1 to 1”. The definition of “Delta Neutral” is that if a portfolio is composed of related financial products and its value is not affected by small price changes in the underlying asset, then the portfolio has the characteristic of being “Delta Neutral”.
Combining the nature of USDe, where the collateral assets consist of an equal amount of ETH spot longs and ETH futures shorts, the Delta value of spot holdings is “1”, the Delta value of futures short exposure is “-1”, and the Delta value after hedging is “0”, thus achieving “Delta Neutral”.
The fundamental nature of “Delta Neutral” determines that the collateral positions of USDe are not significantly affected by small price changes in ETH, thus (under normal circumstances) ensuring the stable collateralization of USDe.
The reason why Ethena Labs adopted such a complex design and how USDe can take market share from well-established stablecoins such as USDT and USDC lies in the focus on returns. USDe pledge users can share dual returns from collateral assets. One is stable income from spot long pledges. Ethena Labs supports pledging ETH through liquidity derivative protocols such as Lido, earning an annualized return of 3% – 5%. The other is unstable income from futures short funding rates. Although funding rates are unstable, for short positions, the majority of the time the funding rate is positive, which means that overall returns are positive.
The combination of these two returns has achieved a considerable yield for USDe. Official data shows that the protocol yield of Ethena Labs and the yield of sUSDe (USDe pledge certificate tokens) have been quite impressive in the past two months. The protocol yield has reached a high of 58.9% and a low of 10.99%, while the highest sUSDe yield has reached 87.55% and the lowest has been 17.43%. The current real-time yield of sUSDe is 27.6%. Comparing this with the previous frenzy caused by MakerDAO’s 8% yield using RWA, it is not difficult to understand why Arthur has so much confidence in USDe.
In October last year, Austin Campbell, a professor at Columbia Business School and founder and managing partner of Zero Knowledge Consulting, analyzed the design structure of USDe. Austin pointed out in the article that he prefers to call USDe a “structured note” rather than a stablecoin, and analyzed the four potential risks of USDe: security risks in the collateral aspect, security and sustainability of the collateral node; security risks of futures contract platforms, both DEX and CEX are exposed to hacking risks; availability risk of contracts, sometimes there may not be enough liquidity for shorting; and funding rate risk, although the funding rate for short positions is mostly positive, there is also a possibility of turning negative, which can be fatal for stablecoins if the overall return after weighted collateral returns is negative.
Currently, the real-time total minted amount of USDe is $234 million, and it has maintained strong growth in the past few months.
Looking ahead, in addition to the just completed $14 million financing, there are several other key points to pay attention to regarding Ethena Labs. Firstly, the public release of the product and the disclosure of the related token economic model. Secondly, Seraphim, the former “face” and expansion lead of Lido, has joined Ethena Labs as the growth lead, which may contribute to the integration of Ethena Labs’ products. Thirdly, Ethena Labs has been included in the first batch of incubation projects of Binance Labs’ Incubation Season 6, which may also greatly accelerate the growth of Ethena Labs.
The challengers in the stablecoin race have come and gone, and hopefully this time, Ethena Labs and USDe will bring a different story.
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