USDe Overview

Ethena enables the creation and redemption of a delta-neutral synthetic dollar, USDe, crypto's first fully-backed, onchain, scalable, and censorship-resistant form of money.

The mechanism backing USDe enables the first "Internet Bond" offering a crypto-native, value-accruing, dollar-denominated instrument, derived from staked asset returns (to the extent utilized in backing) and the funding and basis spread available in perpetual and futures markets.

Peg Stability Mechanism

USDe derives its relative peg stability from executing automated and programmatic delta-neutral hedges with respect to the underlying backing assets.

Hedging the price change risk of the backing asset in the same size minimizes fluctuations in the backing asset price as the change in value of the collateral asset is generally offset by the change in value of the hedge.

This enables the synthetic USD value of the collateral to remain relatively stable in most market conditions.

Ethena does not use any material leverage to margin the delta hedging derivatives positions beyond the natural state as a result of exchanges applying slight discounts to the value of backing assets to the extent used as backing and margin collateral on the initial hedge and issuance of USDe.

Key Information

  1. Users are able to acquire USDe in permissionless external liquidity pools.

  2. Approved institutional parties from permitted jurisdictions who pass KYC/KYB screening are able to mint & redeem USDe on-demand with Ethena contracts directly following whitelisting.

  3. There is no reliance upon traditional banking infrastructure as trustless collateral is held and stored within the crypto ecosystem.

Mechanic Example

  1. A whitelisted user provides ~$100 of stETH and receives ~100 newly-minted USDe atomically in return less the gas & execution costs to execute the hedge.

  2. Slippage & execution fees are included in the price when minting & redeeming. Ethena earns no profit from the minting or redeeming of USDe.

  3. The protocol opens a corresponding short perpetual position for the approximate same notional dollar value on a derivatives exchange.

  4. The backing assets are transferred directly to an "Off Exchange Settlement" solution. Backing assets remain onchain and custodied by off exchange service providers to minimize counterparty risk.

  5. Ethena delegates, but never transfers custody of, backing assets to derivatives exchanges to margin the short perpetual hedging positions.

Generated Yield

The Ethena protocol generates two sustainable sources of yield from the backing assets.

The protocol yield is derived from:

  1. Staked ETH assets receiving consensus and execution layer rewards.

  2. The funding and basis spread from the delta hedging derivatives positions.

Yield from staked assets is floating by nature and denominated in the native asset - for example, liquid staked ETH tokens are typically denominated in ETH.

The funding and basis spread can be floating or fixed depending upon if the protocol uses non-deliverable or deliverable derivatives positions to hedge the backing asset delta.

The funding and basis spread has historically generated a positive yield given the mismatch in demand and supply for leverage in crypto as well as the existence of positive baseline funding. If funding rates are deeply negative for a sustained period of time, such that the staked asset yield cannot cover the funding and basis spread cost, the Ethena reserve fund is designed to bear the cost.

Learn more about the protocol yield.

Risks

The protocol is exposed to various risks including but not limited to:

  1. Smart Contract Risk

  2. External Platform Risk

  3. Liquidity Risk

  4. Custodial Operational Risk

  5. Exchange Counterparty Risk

  6. Market Risk

Ethena recognizes these risks and actively attempts to ameliorate & diversify these risks as much as possible. In practice, this means the system uses multiple providers for each step of the workflow and actively monitors all partners and market conditions.

Every element of the Ethena design has been formulated with risk mitigation in mind including the use of custodians, absence of material leverage, and diversification constraints on the hedging positions

Please refer to the USDe Risk section for more information.

Last updated