Looking ahead, in addition to the just completed $14 million financing, there are several other key issues to focus on surrounding Ethena Labs.
On February 16th, stablecoin project Ethena Labs announced that it had completed a strategic round of financing of $14 million, with Dragonfly, Brevan Howard Digital, and BitMEX founder Arthur Hayes’ family office Maelstrom leading the round.
Last July, Ethena Labs also completed a $6.5 million seed round of financing, led by Dragonfly, with participation from Deribit, Bybit, OKX, Gemini, Huobi, Arthur Hayes, and his family office.
Ethena Labs’ main product currently is the “Delta Neutral” stablecoin USDe, which was inspired by Arthur Hayes, the founder of BitMEX.
In March 2023, Arthur wrote an article titled “Dust on Crust”, in which he discussed his concept of a new generation stablecoin called “Satoshi’s Dollar”, which would be backed by an equal amount of long BTC spot and short futures. Ethena Labs later turned Arthur’s concept into reality, but chose ETH as the main asset for spot and futures positions. In other words, the collateral assets for USDe are made up of equal amounts of long ETH spot and short ETH futures.
Perhaps because Ethena Labs is moving forward with Arthur’s vision, the project has received strong support from Arthur himself in the previous two rounds of financing, and Arthur has even minted a large amount of USDe, publicly stating on the X platform that “USDe will surpass USDT to become the largest USD stablecoin.”
The biggest label of USDe is “Delta Neutral”.
Delta, in finance, is an indicator used to measure the extent to which changes in the price of an underlying asset affect the portfolio. It has a value range of “-1 to 1”. The definition of “Delta Neutral” is that if a portfolio is composed of related financial products and its value is not affected by small price movements in the underlying asset, the portfolio has the characteristic of being “Delta Neutral”.
Considering the nature of USDe’s product, since the collateral assets for this stablecoin are made up of equal amounts of long ETH spot and short ETH futures, the Delta value of the spot holdings is “1”, and the Delta value of the futures short position is “-1”. After offsetting each other, the Delta value becomes “0”, thus achieving “Delta Neutral”.
The fundamental nature of “Delta Neutral” determines that the collateralized minting position of USDe is not significantly affected by small price movements in ETH, thus (under normal circumstances) ensuring that USDe can always maintain a robust collateral status.
The previous section introduced the collateral structure of USDe, so why did Ethena Labs choose such a complex design? How can USDe take market share from well-established stablecoins like USDT and USDC?
The answer lies in the yield. USDe users can enjoy dual income from the collateral assets.
Firstly, there is stable income from the collateralization of long spot positions. Ethena Labs supports the collateralization of spot ETH through liquidity staking protocols such as Lido, earning an annualized return of 3% – 5%.
Secondly, there is unstable income from the funding rate of the futures short position. Users familiar with contracts understand the concept of funding rates. Although funding rates are unstable, for top short positions, the majority of the time, the funding rate is positive, which means overall returns are positive.
The combination of these two income streams allows USDe to achieve a substantial yield. Official data shows that the protocol yield and the yield of sUSDe (USDe staking certificate token) have been quite impressive in the past two months. The protocol yield has reached a high of 58.9% and a low of 10.99%; sUSDe has reached a high of 87.55% and a low of 17.43%.
Currently, the real-time yield of sUSDe is 27.6%. Just think about the frenzy when MakerDAO achieved an 8% yield using RWA in the past, and it’s easy to understand why Arthur has so much confidence in USDe.
In October of last year, Austin Campbell, a professor at Columbia Business School and the founder and managing partner of Zero Knowledge Consulting, published an article dissecting the design structure of USDe.
Austin pointed out in the article that he prefers to call USDe a “structured note” rather than a stablecoin, and analyzed the four layers of potential risks for USDe:
The first is the security risk of the collateralization layer, whether the security and sustainability of the collateralization nodes can be guaranteed;
The second is the security risk of the futures contract platform, both DEX and CEX are exposed to hacking risks;
The third is the availability risk of the contract, sometimes there may not be enough liquidity for shorting;
The fourth is the funding rate risk. Although the funding rate for top short positions is mostly positive, there is also a possibility of turning negative. If the overall yield is negative after factoring in the weighted collateralization yield, it can be quite fatal for a “stablecoin”.
Currently, the real-time total minted amount of USDe is $234 million, and it has maintained strong growth momentum in the past few months.
It is worth mentioning that Ethena Labs has not publicly released its product, and access to USDe products is currently by invitation only, making its performance even more remarkable.
Looking ahead, in addition to the just completed $14 million financing, there are several other key issues to focus on surrounding Ethena Labs. One is the public release of the product and the disclosure of the related token economic model. The second is that Seraphim, the former “face” of Lido and the expansion software lead, has joined Ethena Labs as the Head of Growth, which may help drive the integration of Ethena Labs’ products. The third is that Binance Labs has included Ethena Labs in the first batch of incubation projects for Incubation Season 6, which may also be a significant boost for Ethena Labs’ accelerated growth.
The challengers in the stablecoin race come and go, and hopefully this time, Ethena Labs and USDe will bring a different story.