Ethena Labs is a decentralized protocol developed on the Ethereum blockchain. Its purpose is to offer a crypto-based alternative to traditional banking systems. Founded by Guy Young, the protocol introduces a globally accessible and permissionless savings instrument known as the 'Internet Bond,' (USDe) denominated in dollars. ^[1][2][3]

Overview

Ethena is a DeFi startup that offers derivative infrastructure to transform Ethereum into the first crypto-native yield-bearing synthetic dollar, independent of traditional banking systems. ^[1][3]

Ethena's product suite includes a delta-neutral synthetic dollar, USDe featuring embedded yield, globally accessible floating and fixed-rate USD-denominated bonds, and capital-efficient and composable leverage. Users can deposit USD, Ethereum, or liquid staking tokens as collateral to create USDe. This marks the first decentralized, scalable, and stable asset, deriving returns from the economic activity of Ethereum and futures markets. ^[3]

To ensure security, transparency, and programmability, Ethena distributes collateral to a diverse set of on-chain MPC (Multi-Party Computation) custodial contracts, eliminating the reliance on centralized servers for custody and mitigating counterparty risk. ^[1]

USDe generates embedded yield for users through staked Ethereum returns and by capturing the basis in ETH perpetual funding rates. ^[1]

“We want to separate the most important instrument in crypto, which is the stablecoin, from the banking system. The point of everything we're trying to do is to create a self sufficient system, and yet the most important asset is completely centralized”. - Guy Young on goals for Ethena & its stablecoin, USDe^[6]

Funding

In July 2023, Ethena raised $6 million in a seed funding round led by crypto-focused venture capital firm Dragonfly with participation from BitMEX founder Arthur Hayes and his family office, Maelstrom. Additionally, major crypto derivatives exchanges Deribit, Bybit, OKX, Gemini, and Huobi, along with several venture capital and trading firms, also invested in the round. ^[4]

The $6 million seed investment was to enable Ethena to prepare for the launch of its stablecoin and bond asset, USDe. The company planned to complete the testnet phase, establish partnerships with industry leaders, and conduct smart contract audits to ensure the security and efficiency of the protocol. ^[4][5]

USDe Creation Mechanics

USDe is generated through a user depositing either LST, ETH, or USD. The internal swap function harmonizes with the collateral position. Subsequently, Ethena directs the collateral to an off-exchange custody account, providing a ZK proof of position solvency. The off-chain server calculates the venue with the most efficient funding rate, executing a 1x short ETH-PERP. Stability is ensured through the delta-neutral positioning between spot stETH and the short ETH perpetual. ^[3]

Depositors receive issued USDe, which accumulates yield from staked Ethereum returns and funding payments received. This process ensures a transparent and secure mechanism for creating and maintaining USDe within the Ethena ecosystem. ^[1][3]

Scalability is achieved by utilizing derivatives which allow for USDe to scale without significant over-collateralization since the staked ETH collateral can be perfectly hedged with a short position of equivalent notional, the stablecoin only requires 1:1 collateralization.

Stability is provided through unlevered short perpetual positions executed against the collateral immediately on issuance which ensures the position is delta-neutral and that USDe is never issued to users without the initial notional balance being perfectly hedged. ^[3]

Censorship Resistance is achieved by separating collateral from the banking system and storing trustless crypto collateral outside of centralized liquidity venues in on-chain, transparent, 24/7 auditable, programmatic custody account solutions. ^[3]