Surpassing Tether as the Largest Stablecoin? Everything You Need to Know about What Ethena (ENA) Is

2024-04-08, 04:24

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Stablecoin is the most important trading medium in the cryptocurrency industry. Since 2013, in all the changes in cattle and bears, the narrative of Stablecoins has been indispensable. According to their nature, there are currently several directions for Stablecoins:

1. Centralized Stablecoins, such as USDT and USDC, are the most widely covered Stablecoins;
2. Over-staked Stablecoins, such as DAI;
3. Algorithmic Stablecoins, such as UST;
4. Zero-risk synthetic US dollars in the early stage, such as USDe, which will be discussed in this article;

## The Current Problems with Stablecoins
The problem with USDC and USDT lies in their centralization, which mainly involves risks such as regulatory review, high reliance on existing banking systems, and decoupling of internalized returns.

The problem with MakerDAO's DAI is that it is neither decentralized nor stable. Moreover, its capital efficiency is not high. DAI is only 50 basis points away from its $1 anchoring during 62% of its lifecycle. Moreover, it is not decentralized, as over 65% of the collateral supporting it is centralized fiat-backed Stablecoins and WBTC (this proportion has been increasing and may continue to grow). To expand DAI, MakerDAO was forced to sacrifice decentralization. Nowadays, DAI plays the role of wUSDC, and as more and more collateral is centralized fiat-backed Stablecoins, this becomes increasingly evident.

The problem with Basis and other algorithmic Stablecoins that are either uncollateralized or undercollateralized, such as Empty Set Dollar or Ampleforth, is that these systems are reflexive and fragile. These algorithmic Stablecoins cannot maintain their anchoring well.

If people don't believe that algorithmic Stablecoins will work, they will collapse. For example, the well-known Luna algorithmic Stablecoin UST.

Luna has created a Stablecoin called UST, with a market value of approximately $2.5 billion. Users can create a UST by burning $1 of LUNA at the current market price, while users can redeem $1 of LUNA at the current market price to obtain a value of $1. This is a highly reflexive Stablecoin system.

UST's design is scalable and decentralized, but it carries survival risks. If the price of LUNA drops, it may trigger a "run" - users will quickly redeem their UST to get $1 of LUNA and sell it. As the pressure of sale drives prices down, it is necessary to cast more LUNA for each redeemed UST, and the supply of LUNA may become excessively inflated. So, in May 2022, with the detachment of UST, a major collapse of the cryptocurrency market occurred. LUNA fell from tens of dollars to zero within three days, and the overall cryptocurrency market also experienced a sharp decline.

## What Problem is Ethena Trying to Solve?
Ethena is a synthetic dollar protocol based on <a href="/id/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a>, which will provide crypto-native solutions for currencies that do not rely on traditional banking system infrastructure, as well as a globally accessible US dollar-denominated savings tool - "Internet bond." Ethena's synthetic US dollar USDe will provide the first anti-censorship, scalable, and stable cryptocurrency native solution for funds realized through Delta hedging against Ethereum collateral.

The mechanism of Ethena is similar to a seesaw, and its Stablecoin is called USDe. If the price of ETH is $1 when minting 1 USDe, the system entrusts 1 ETH to the derivatives exchange to short 1 ETH;
![](https://gimg2.gateimg.com/image/article/17125501311.jpg)

If the ETH price drops from $1 to $0.1, the short contract value of 10 ETH*$0.1 is still $1;
![](https://gimg2.gateimg.com/image/article/17125501532.jpg)

If the ETH price increases from $1 to $100, the short contract value of 0.01 ETH*$100 will still be $1, and the balance of the Ethena system will be achieved through contract hedging, ultimately creating a synthetic USD Stablecoin USDe with native decentralized equal collateral.

## What Is the Difference Between USDe and Other Stablecoins?
Stablecoins in the cryptocurrency field require collateral, which supports Stablecoins' value. Whether it's MakerDAO's DAI, Curve's crvUSD, or <a href="/id/price/aave-aave" target="_blank" class="blog_inner_link">Aave</a>'s GHO, regardless of the mechanism, their purpose is to collateralize assets to release purchasing power, and the more essential thing is to leverage.

Ethena has created a Stablecoin called USDe that always maintains a 1:1 exchange rate with the US dollar. USDe will become an anti-censorship, scalable underlying asset used in DeFi applications. Because it combines the staked income of Ethereum and the income of the futures market, anyone can get a return in dollars through it, and it can also become an "Internet bond" like the US treasury bond bonds on the Internet. It is widely used as an underlying asset in DeFi. You can also create different bonds based on different hedging strategies, such as using perpetual contracts for hedging and creating floating rate bonds. Using delivery contracts for hedging can create fixed-rate bonds.
![](https://gimg2.gateimg.com/image/article/17125502263.jpg)
Users who stake ETH to receive USDe in Ethena are profitable. Thanks to the upgrading of Ethereum Shanghai, ETH has become a crypto treasury bond, and bonds mainly issued by Ethereum are equivalent to treasury bonds.

The users who staked USDe can share the dual benefits from the collateralized assets:

1. The first is stable returns from spot-long staking. Ethena Labs supports staking spot ETH through liquid collateral derivative protocols such as Lido to earn annualized returns of 3% to 5%.

2. The second is the unstable returns from the rate of short funds in futures. Users familiar with contracts are familiar with the concept of fund rates. Although fund rates are unstable, for short positions, most of the time is spent with a positive fund rate in the long run, which also means that overall returns will be positive.

The combination of the two benefits has achieved a considerable return rate for USDe. Official data shows that the Ethena Labs protocol yield and sUSDe (USDe staking voucher token) yield have performed remarkably well in the past two months, with the highest protocol yield reaching 58.9% and the lowest reaching 10.99%. The highest sUSDe reached 87.55% and the lowest was 17.43%.

<div class="blog-details-info">
<div>Author:**Icing**, Gate.io Researcher
<div>Translator:Joy Z.
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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