Ethena Adopts Bitcoin as a Stability Asset for USDe Enhancement

Last Updated on April 5, 2024

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Key Takeaways:

  • Ethena is enhancing USDe stability and yield by shorting ETH futures and has now expanded its strategy to include bitcoin, employing a cash-and-carry trade to safeguard USDe’s value.
  • With the addition of bitcoin, Ethena aims to increase the safety, stability, and issuance capacity of USDe, leveraging the more liquid BTC derivative markets for scalability and liquidity.
  • Ethena’s operational model involves users depositing stablecoins, which are converted into USDe for staking, utilizing a futures mechanism to maintain USDe’s value and generate funding yield through holding and shorting bitcoin.

Ethena is leveraging a sophisticated strategy involving bitcoin to enhance the stability and yield of its USDe tokens. Here’s how they’re doing it:

Since its introduction, Ethena has been engaging in the practice of shorting ether (ETH) futures and capturing funding rates as a means to generate returns on its USDe tokens, a synthetic dollar designed to always be worth $1.

To date, this approach has been quite successful, with more than $2 billion in USDe issued and a continuously growing demand.

In a significant strategic shift, Ethena Labs is set to extend its methodology to include bitcoin (BTC), employing a cash-and-carry trade technique.

This involves buying bitcoin while simultaneously shorting bitcoin futures, a move aimed at both safeguarding the value of USDe and potentially increasing its yield for holders.

This strategy is not without its critics, but the anticipated benefits have continued to attract interest.

Adding bitcoin into the mix is expected not only to enhance the safety and stability of USDe but also to significantly expand its issuance capacity.

According to Ethena developers, the platform’s hedges currently account for about 20% of ETH open interest.

With $25 billion of BTC open interest available for similar strategies, Ethena’s capacity to scale its operations could grow more than twofold.

The developers highlight the expanding and more liquid BTC derivative markets as advantageous for scalability and liquidity, which in turn promises a more robust and secure product for users.

Ethena’s operational model allows users to deposit various stablecoins, which can then be converted into USDe for staking.

This process includes a futures mechanism akin to a cash and carry trade, where profitability comes from funding payouts rather than asset price movements.

Essentially, users mint USDe by depositing funds (e.g., $10 million in tether), which Ethena then exchanges for BTC.

To counteract bitcoin’s price volatility and stabilize USDe value, Ethena shorts an equivalent amount in BTC futures.

This method not only maintains the value of USDe but also generates funding yield, benefitting USDe holders.

Through this dual approach of holding and shorting bitcoin, Ethena aims to offer a more stable and potentially more lucrative USDe, aligning with its goal of creating a safer and more scalable synthetic dollar product amidst the dynamic and evolving landscape of cryptocurrency markets.

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Victor Fawole, a seasoned Web3 content creator and social media influencer, excels in bringing the pulse of the crypto world to our readers.

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