USDe: Ethena Labs’ Stablecoin Initiative Gains Traction
The stablecoin initiative USDe by Ethena Labs has experienced significant adoption, with its market cap surging by over 40% in the last week and by 400% in the last month, reaching $840 million. Despite concerns raised within the community following the Terra ecosystem’s downfall, Arthur Hayes remains optimistic about the launch of USDe, seeing Ethena as a leading contender in the crypto space to deliver a synthetic USD based on a public blockchain.
USDe vs. UST: Understanding the Differences
Ethena Labs introduced its USDe synthetic dollar on the public mainnet on February 19. However, some investors were apprehensive due to its high annual percentage yield (APY) of 27.6%, surpassing the yield provided by Anchor Protocol on Terra’s UST prior to its collapse.
Arthur Hayes clarifies that USDe generates yield differently from UST. In his latest blog post, he explains that Ethena utilizes two assets to generate yield: ETH staking yield and positive perp swap funding. This unique combination is responsible for generating the yield of USDe, which is independent of the value of Ethena’s governance token. Therefore, USDe and UST generate yield through distinct mechanisms.
“As people come to believe that the USDe yield isn’t fugazi, USDe in circulation will grow. The next step is owning a piece of the kingdom. That is where the forthcoming Ethena governance token comes into play.”
Risks Associated with UST and USDT
Hayes emphasizes that Ethena carries exchange counterparty risk since it is not decentralized and does not aspire to be. Instead, it maintains short perp swap positions on centralized derivative exchanges.
If these exchanges fail to fulfill their obligations, such as paying out profits on swap positions or returning deposited collateral, Ethena could incur capital losses. To mitigate this risk, Ethena employs third-party custodians, similar to how Tether relies on traditional financial (TradFi) banks to address its counterparty risk.
While Tether faces counterparty risk with TradFi banks, Ethena’s risk lies with derivative exchanges and crypto custodians. However, it’s important to note that these exchanges are also investors in Ethena and have a vested interest in maintaining security and ensuring proper payouts on derivatives.
As profitable entities within the crypto industry, they are motivated to sustain their profitability. As Ethena expands and open interest in derivatives grows, fee income for these exchanges increases, aligning incentives for mutual success.
In contrast, traditional banks perceive Tether as a threat to their existence and are not supportive of crypto. Therefore, their incentives are not aligned with the success of Tether. Similarly, regulators may not be aligned with Tether’s success either.
Hot Take: USDe’s Promising Future
The launch of USDe has garnered significant attention and adoption within the crypto community. With its unique approach to generating yield and its focus on a synthetic USD based on a public blockchain, Ethena Labs is positioning itself as a leading contender in the space.
Although concerns have been raised about potential risks associated with exchange counterparty risk, Ethena mitigates this by employing third-party custodians who have a vested interest in maintaining security and ensuring proper payouts on derivatives.
As USDe gains more credibility and trust within the community, its circulation is expected to grow, paving the way for the forthcoming Ethena governance token. With its recent market cap surge, USDe has demonstrated its potential in the stablecoin market.
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