Ether-Based Crypto Dollar Issuer Ethena Raises $14M, Opens Access to Public

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Ethena Labs opened public access to its ether-based synthetic dollar after raising $14 million from investors including PayPal Ventures, asset manager Franklin Templeton, the company said Friday.

The investment round was led by previous investors Dragonfly and Maelstrom – the family office BITMEX founder Arthur Hayes. Avon Ventures – an affiliated venture fund of FMR, parent company of Fidelity Investments – and venture funds of major exchanges including Bybit, OKX, Deribit, Gemini also participated alongside PayPal and Franklin Templeton.

Ethena also $6 million in July, bringing the total venture capital funding to $20 million with the latest round.

While Ethena calls its USDe token a synthetic dollar, not a stablecoin, it is vying for a piece of the $130 billion stablecoin market. Stablecoins are blockchain-based representations of cash, predominantly the U.S. dollar backed by U.S. Treasuries and bank deposits. They have become a key part of the plumbing of the crypto economy for liquidity and value transfers, and also increasingly serve as a value haven in developing countries with fragile banks and fiat currencies like Argentina.

Issuing stablecoins can also be very profitable, with the issuer benefiting from interest earned on reserve assets that doesn't have to be passed on to holders. Tether, the largest stablecoin issuer, posted a fourth-quarter profit of $2.85 billion.

“The entire space relies on centralized stablecoins with collateral backing residing within the banking system," co-founder and CEO Guy Young said. "Providing a crypto-native synthetic dollar alternative is, in our view, the single largest opportunity within the space.”

How USDe works

Ethena's USDe aims to offer a dollar-denominated savings vehicle with yield for investors outside of the U.S. that is independent from the traditional financial system and banking rails.

USDe uses ether liquid staking tokens such as Lido's stETH as backing assets. It pairs them with an equal value of short ETH perpetual futures position on derivatives exchanges to keep a "rough target" of $1 price, replicating a "cash and carry" trade. Shorting is a way of betting that a price will decline.

This way movements in the two positions even out any directional changes in the ether price, giving a "delta neutral" investment position. Collateral for the perps is kept safe and settled with institutional-grade custodians such as Fireblocks, Copper and Bitgo.

Users can create, or mint, USDe tokens by depositing stablecoins such as Tether (USDT), USDC, DAI, and others on the Ethena protocol. They can then lock, or stake, USDe to get sUSDe and receive a yield, originating from the native ETH staking yield and harvesting the futures funding rate.

This is an attractive investment when the market is hot – as is the case now. The long side of the market pays shorts for keeping their positions open. At press time, the sUSDe position paid a weekly average of 27% annualized yield to stakers.

Stablecoin yields

High stablecoin yields may raise the alarm for crypto investors who remember the spectacular implosion of Terra-Luna's algorithmic stablecoin in May 2022. Terra's UST paid out nearly 20% yield to stakers via the Anchor protocol before falling into a hyperinflationary death spiral when investors withdrew en masse and disposed of UST and its twin token LUNA used for price stabilization.

According to Young, Ethena's sUSDe yield will always depend on the present market environment. Terra's stablecoin design was flawed and its yield artificially set and funded by developer firm Terraform's treasury, he said. If the market turns and USDe's cash-and-carry trade loses its luster, investors can unstake tokens and withdraw their holdings from Ethena after a seven-day waiting period, which unwinds the underlying cash-and-carry trade by selling staked ETH and covering the short futures position.

Given its design, USDe is a complex, structured financial product rather than a typical stablecoin, and carries its own set of risks.

While Ethena is not exposed to the banking system – some may remember last March when second-largest stablecoin USDC's key deposit partner Silicon Valley Bank went under – USDe is exposed to counterparty risks of partner liquid staking protocols and derivatives exchanges, Austin Campbell, the former head of portfolio management at stablecoin issuer Paxos, pointed out in an X post. Campbell also noted liquidity risks on the futures market during times of crisis that could result in inadequate market depth to take short positions.

Notably, the team last year stopped calling USDe a stablecoin and started marketing it as a "synthetic dollar" to avoid confusion, Young pointed out.

Nevertheless, the protocol already has attracted over $220 million in deposits since opening access to early investors in December, DefiLlama data shows.

"I believe post-launch it will quickly surpass $1 billion," Arthur Hayes said in a statement. "Ethena is on the warpath aiming to disrupt the entire stablecoin ecosystem and will soon be a credible challenger to Tether."

Edited by Sheldon Reback.

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