In the initial guarded mainnet phase all addresses will need to be whitelisted by the Ethena Protocol after satisfying KYC/AML checks, after which point the protocol will be opened and permissionless to access USDe. US users are not able to access the application. Feel free to reach out in our Telegram or Discord for help onboarding.
How is stability maintained?
USDe's peg stability is maintained through the protocol immediately hedging the delta of protocol collateral. This aims to ensure that the underlying collateral supporting USDe does not vary in "USD" equivalent value under any market conditions or price action.
Security & Safety of Deposited Collateral
How is protocol collateral kept safe from hacks or exchange failures?
Protocol collateral is custodied solely by audited smart contracts as well as regulated & licensed custodians and MPC wallet providers. Our custodian and MPC wallet provider partners have the highest possible security and are used by all institutional participants in the space. Our use of custodians and MPC wallet providers also enables us to custody funds off-exchange, but to still have funds available on the exchanges to collateralize the delta hedging derivatives positions. In the event of an exchange failure, the funds are NOT expected to be locked or party to the bankruptcy and Ethena should retain control to support all mint & redeem requests of USDe on demand.
Why don't we just custody assets with the exchanges?
Custodying protocol collateral with exchanges exposes the protocol to risks if an exchange were to limit/delay withdrawals or were to close suddenly like FTX. Our ability to use off-exchange custody providers enables us to enjoy the benefits of a disintermediation of incentives as well as the availability of collateral to trade on the most liquid markets.
The protocolshares yield with certain users, how is that received?
The yield Ethena generates come from two different sources:
Staked ETH yield
Perpetual Futures Funding Rates or Expiry Futures Basis
On the collateral side, staked Ethereum backing USDe will offer a yield that is currently around 4-5%. The delta hedged derivative positions offsetting the collateral can also earn a yield on both perpetual futures funding rates and the basis on dated futures.
Basis refers to the difference between the spot price of an asset and the price of the corresponding expiring futures contract. More on basis trades here.
Funding Rates are periodic payments made to traders who are long or short depending on the difference between spot prices and perpetual contract markets. Consequently, traders will either pay or get funding based on open positions depending on demand for long or short positions. When the funding rate is positive, long positions pay shorts; when it is negative, short positions pay those long the contract. This mechanism ensures avoiding long-term divergence in the prices of the two markets.
Both dated futures basis and perpetual funding rates have, on average, returned a yield to the short side of c.6-7% over the last 3 years, leading to an excess yield over staked Ethereum.
This protocol yield is variable, transparent, sustainable, and provided to users (net of yield that accrues to the insurance fund) according to the staking mechanism.
Aren't perpetual futures funding rates volatile?
Perpetual futures funding rates have two primary components: the interest rate and the premium. The venue determines how funding rates are calculated. Funding rates may exhibit sharp behavior during times of market volatility, they may go negative for significant periods but usually revert closer to zero or positive and display mean-reverting characteristics.
Historically, long positions have paid the funding rate to the short side, which on average will provide Ethena with an excess yield over ETH staking yield. The table below summarizes the distribution of funding rates since inception. We can see that the mean for open interest-weighted funding rates is 6.84% annualized, when combined with a stETH yield of 4% would provide a total yield of 10.84%.
How does this affect the combined protocol yield?
Combining the different yield sources gives us an excess yield, which is broken down below for each perpetual future contract per quarter. Q3 2022 was the only quarter with a negative excess yield on some exchanges thanks to an arbitrage opportunity related to the ETH Proof of Work token airdrop post-Merge.
There are "Quick Answers" available throughout the documentation as well.
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