New Exploration of the Native Synthetic Stablecoin USDe in Crypto Assets

Recently, an innovative stablecoin USDe, which lies between centralized and decentralized, has attracted market attention. As a structured passive income product, USDe secures assets on-chain and provides returns to holders while maintaining stability through a Delta neutral strategy.

The background of USDe's birth is that the stablecoin market is dominated by centralized stablecoins such as USDT and USDC, while the collateral for decentralized stablecoin DAI is gradually becoming centralized, and algorithmic stablecoins like UST have collapsed after rapid growth. USDe aims to seek a balance between DeFi and CeFi.

The protocol uses OES( Off-exchange Settlement ) services to custody assets on-chain and map amounts to margin provided by the exchange. This method retains the characteristics of DeFi capital isolation, reducing risks such as the misappropriation of funds by exchanges, while leveraging CeFi to obtain sufficient liquidity.

The underlying yield of USDe comes from the staking yield of Ethereum and the funding rate yield from the exchange's hedged positions. Currently, the protocol is incentivizing liquidity through a points system.

The USDe ecosystem includes three main assets:

• USDe: stablecoin, minted by depositing stETH
• sUSDe: the certificate token obtained by staking USDe
• ENA: protocol governance token, can be obtained through points redemption

Minting and Redemption of USDe

Users can deposit stETH at a 1:1 ratio to mint USDe. The deposited stETH will be sent to a third-party custodian and mapped to the exchange. The protocol then opens a short perpetual position on ETH at the exchange to ensure that the collateral value remains dollar-neutral.

Ordinary users can obtain USDe in the liquidity pool. Institutions that have completed KYC can directly mint and redeem USDe through contracts. Assets are always held in a transparent on-chain custody address, without relying on traditional banking infrastructure.

OES: ceDeFi Custody Method

OES utilizes MPC technology to construct custodial addresses, saving user assets on-chain to maintain transparency, while being jointly managed by users and custodians, eliminating counterparty risk in exchange transactions.

OES providers collaborate with exchanges to enable traders to map their asset balances to the exchange for trading. This allows Ethena to custodian funds outside the exchange while still being able to use those funds as collateral for hedging positions within the exchange.

Profit Methods

The profits of USDe mainly come from two aspects:

1. Ethereum staking rewards brought by ETH liquidity derivatives
2. The funding rate income obtained from opening a short position on the exchange and the basis trading income

The funding rate is based on the difference between the spot price and the perpetual contract market, regularly paid to traders holding long or short positions. The basis refers to the deviation between spot and futures prices, which tends to approach 0 as the futures contract nears expiration.

Ethena formulates different strategies for arbitrage by using the fund balances mapped to exchanges, providing diversified returns for USDe holders.

Yield and Sustainability

Recently, the annualized yield of the USDe protocol reached a maximum of 35%, with the yield allocated to sUSDe reaching 62%. This difference is due to not all USDe being converted into sUSDe. Some USDe will enter DeFi protocols like Curve to meet different application needs and potentially enhance the yield of sUSDe.

However, as the market cools down, the long funds of exchanges decrease, and the funding rate income also declines. After April, the overall yield has significantly decreased, and the protocol yield has dropped to 2%, while the sUSDe yield has fallen to 4%.

The yield of USDe is more dependent on the situation of centralized exchange futures contract market and is constrained by the scale of the futures market. When the issuance of USDe exceeds the capacity of the corresponding futures market, it will limit its further expansion.

Scalability

The scalability of USDe is mainly constrained by the total value of open interest in the ETH perpetual market (Open Interest). Currently, the ETH open interest is approximately 12 billion USD, and the BTC open interest is approximately 30 billion USD.

The current issuance of USD is about 2.3 billion USD, ranking fifth in the stablecoin market cap. Its scalability is closely related to the size of the perpetual market, which is also the reason why Ethena chooses to cooperate with centralized exchanges.

Considering that the Open Interest of ETH and BTC is approaching or reaching historical highs, the further expansion of USDe's market capitalization may face challenges. Excessive issuance of USDe could drive down funding rates, affecting protocol yields.

USDe may become a high-yield, short-term limited scale, long-term market-following stablecoin.

Risk Analysis

1. Funding Rate Risk: When the market is underweight on longs or when there is excessive issuance of USDe, there may be a risk of negative funding rates.

2. Custody Risk: Fund custody relies on OES and centralized institutions, posing potential risks of exchange bankruptcy or fund theft.

3. Liquidity Risk: A large amount of funds may face liquidity shortage issues during market stress.

4. Asset anchoring risk: stETH is theoretically anchored 1:1 with ETH, but has historically experienced brief decoupling.

To address these risks, Ethena has established an insurance fund, with funding coming from a portion of the protocol's revenue distribution.