[Serenity Premium] Ethena and Its Innovative USDe [Initial Review Feb 2024]

Ethena is the issuer of stablecoin USDe, the latest stablecoin with a very innovative collateralisation method.

Basic Concept

Traditionally, non-fiat backed stablecoins are either overcollateralised, or driven by algorithms. The latter, like UST or many other ponzi-type stablecoins, did not work in the history of stablecoins. The former are the main stream now, but there's a requirement for overcollateralisation. Overcollateralisation means capital inefficiency.

Ethena proposes a flat-collateralisation concept: each USDe is collateralised only by $1 worth of ETH. This is achieved by using ETH as collateral, and hedging ETH in an exchange.

The process is illustrated in the above picture from the official documentation:

1. A user deposits with Ethena's smart contract some stETH as collaterals, and mint the USDe of the same value.

2. These stETH collaterals are sent to an MPC wallet, called Off-Exchange Service Provider here. This is basically to safe-guard exchange exposures, by not putting the principal but only the profit/loss with exchanges.

3. Ethena then short ETH of the same value in leading exchanges.

This is actually very similar to our delta neutral strategy - owning crypto A and short 1x of the crypto A in a CEX or DEX, using crypto A as collateral. In our weekly tracking list, you can do this on Binance or GMX. We term this process as coin-marginated futures funding rate.

Such strategy uses cryptocurrency as collatera, is delta neutral and has a decent yield. Ethena has converted this successfully into a stablecoin.

Theoretical Price of USDe in the Events of stETH Price Volatility

This is often an issue as we explain this strategy is delta neutral and has no liquidation risk. In the Ethena context, this is why USDe maintains a theoretical price of $1.