How USDe enables scalability

  1. Collateralization Ratio

USDe is backed at a 1:1 ratio thanks to a delta-neutral strategy, where short ETH futures positions offset any changes in value to the underlying collateral.

The result is the most capital-efficient synthetic dollar in the industry.

Other onchain overcollateralized "stablecoins" tend to run minimum collateral ratios of ~150%, with some even higher, requiring more capital to be locked up than the stablecoin it mints. Effective overcollateralization is often over 200%.

While this approach is a good way to ensure stability when using decentralized collateral, the capital inefficiency of doing so means that the stablecoin cannot scale into the billions without taking on more centralized collateral, as we have seen with the proliferation of onchain RWAs. This opens up censorship risk and essentially makes the stablecoin a wrapper for U.S Treasuries. The only way to ensure capital efficiency and relative stability using decentralized collateral is to delta hedge any price exposure on trustless crypto collateral.

  1. CeFi Liquidity

Unfortunately, decentralized perpetual liquidity isn’t sufficient to allow Ethena to achieve its goal of scaling USDe into the billions. Projects like UXD have tried to solely use decentralized exchanges, but the lack of liquidity severely limited their ability to scale, while others have fallen victim to hacks and exploits of the decentralized exchanges.

With >25x the open interest on perpetual futures on centralized exchanges, a synthetic USD asset that leverages that liquidity has the ability to scale exponentially larger than would be possible on just decentralized exchanges living purely onchain.

  1. Scalable Collateral Base

The consensus view among Ethereum researchers and the ecosystem is that 30% of ETH supply staked is a very realistic near-term goal, with 25% of ETH supply staked currently (as of February 2024).

At current prices that’s an extra ~$20bn of staked ETH growth, on top of an already impressive total of ~$40bn today. There is more than sufficient liquid staking token ("LST") collateral available to be used to mint USDe & for USDe to scale into the billions.

In order to scale the product even further, Ethena may use BTC or other non-ETH assets as collateral in the future. Our product design is extendable in such a way that we are able to support any crypto asset with a sufficiently liquid derivatives market.

Currently, BTC funding rates closely mirror ETH’s, with funding being paid to the short side in the range of 5-7% annually on average. If those market dynamics hold in the future, BTC has been onboarded as collateral backing USDe while still generating an attractive protocol yield.

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