Ethena USDe (USDe) is a new algorithmic stablecoin based on a delta-neutral strategy
The crypto market is dominated by centralized stablecoins that their issuers fully control. According to CoinMarketCap, as of April 2024, the two largest stablecoins, USDT and USDC, had a share of almost 90% or $139.7 billion in the sector.
Several attempts have been made to introduce algorithmic decentralized stablecoins, but they have failed. Among the alternatives, there are only DAI and FRAX, but they can only be called partially decentralized. Not so long ago, a new player appeared on the crypto market, and there are high hopes for it — the USDe stablecoin from Ethena.
What is USDe?
USDe is a new stablecoin released by the Ethena Labs team in February 2024 on Ethena's DeFi platform. It is presented as the first censorship-resistant, scalable, and stable savings solution.
The Ethena platform is a decentralized protocol based on the Ethereum blockchain for issuing "synthetic" stablecoins, the first of which is USDe. The developers of Ethena sought to create a solution that is independent of a centralized banking system but still provides tools to protect against the volatility of crypto-assets, which are stablecoins.
USDe was originally issued as an ERC-20 token on the Ethereum network, but as of April 2024, this stablecoin also exists on networks:
What is the difference between USDe and other stablecoins?
Classic stablecoins like Tether (USDT), USD Coin (USDC), First Digital USD (FDUSD), and the like are backed by fiat reserves and securities, and a centralized issuer like Tether or Circle completely controls their issuance and burning.
These companies control the issuance of their stablecoins and the movement of assets. For example, Tether and Circle can freeze USDT tokens at specific addresses, such as those on OFAC's sanctions list, and even burn the stablecoins in those wallets. Such features have caused some crypto community members to distrust the centralized USDT, USDC, GUSD, and other stablecoins.
The USDe stablecoin has an entirely different mechanism. First, USDe is backed by collateral in the ETH cryptocurrency, which is staking. Second, the USDe peg is supported by a delta-neutral trading (or sustainability) mechanism ubiquitous in the traditional finance market (TradFi).
The Ethena platform provides users with another type of digital asset: USDe-based Internet Bonds. Internet Bonds consider the returns from ETH staking and give access to the futures and options markets.
How does the issuance and pegging of USDe to the US dollar work?
As mentioned above, the USDe mechanism is based on a delta-neutral strategy. In other words, USDe is an algorithmic stablecoin that is remotely similar to DAI. Delta-neutral strategy is popular among traders in the options market to control the risks (hedging) caused by the volatility of the underlying asset, which, in this case, is the Ethereum cryptocurrency.
The delta is the difference between the change in the option price and the exact value of the underlying asset. If the delta value becomes too large, an arbitrage window occurs, allowing traders to profit from price fluctuations, which will eventually lead to a narrowing of this indicator and stabilization of the option price.
USDe is generated when a user deposits liquidity tokens stETH, which are received in exchange for staked ETH cryptocurrency in the Lido Finance protocol, and forms a pledge from them. It is not necessarily necessary to deposit ETH into staking to receive stETH: they can be bought on some centralized and decentralized exchanges, such as Uniswap, Curve, and Open Ocean.
USDe outlook and risks
In just one quarter after launching in December 2023, Ethena's DeFi protocol blockchain (TVL) assets have grown from zero to $2.2 billion, according to DeFi Llama data as of April 2024. Moreover, the most active growth of the platform occurred only in the last two months.
Even large centralized exchanges and the world-famous market maker Wintermute supported the project.
However, new stablecoins, such as USDe, contain high risks. First, too little time has passed before judging the sustainability of the USDe stablecoin. This stablecoin has not yet shown itself in "stressful situations" when crypto assets on the market either skyrocket or fall. In other words, we have not yet seen the reliability of the delta-neutral strategy mechanism of USDe in practice. The collapsed UST stablecoin was also relatively stable until large investors "unloaded" vast amounts of cryptocurrencies into exchange bid stacks. It should be noted that the USDe stablecoin rate shows high stability and only twice in 2 months deviated more than 0.5%.
Secondly, USDe capitalization is still minimal compared to USDC and especially USDT. For comparison, USDe and USDT differ about 50 times: $2.5 billion vs. $107 billion. However, it is worth noting that USDe is in fifth place in capitalization and has already surpassed many other stablecoins, such as USDD from Tron, FRAX, True USD (TUSD), and GUSD. As of April 2024, USDe has more than 2.5 times its capitalization in the last month alone.
The prospects of the USDe stablecoin are still uncertain: market data indicates high demand for algorithmic stablecoins, but it is still too early to judge the reliability of this token, given the unfortunate experience with UST and some other lesser-known stablecoins.
