Unveiling the Stablecoin Disruptor: Ethena Labs, Valued at $300 Million in the Eyes of Arthur Hayes

Original | Odaily Planet Daily
Author | Azuma

On February 16th, stablecoin project Ethena Labs announced that it had completed a strategic funding round of $14 million at a valuation of $300 million. The round was led by Dragonfly and the Maelstrom office of Arthur Hayes, the founder of BitMEX.

In July of last year, Ethena Labs completed a seed funding round of $6.5 million, with Dragonfly leading the round and participation from Deribit, Bybit, OKX, Gemini, Huobi, Arthur Hayes, and his office.

Table of Contents
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Inspiration from Arthur Hayes
What is “Delta Neutral”?
Yield is King
Four Layers of Potential Risks
Current Data and Future Outlook

Ethena Labs’ current main product is the “Delta Neutral” stablecoin USDe, which was inspired by the founder of BitMEX, Arthur Hayes. In March 2023, Arthur wrote an article titled “Dust on Crust,” in which he discussed his concept of a new generation stablecoin called “Satoshi Dollar,” which would be backed by an equal amount of BTC spot longs and futures shorts.

Ethena Labs subsequently turned Arthur’s concept into reality, but chose ETH as the main underlying asset for spot and futures positions. In other words, the collateral assets for USDe consist of an equal amount of spot ETH longs and futures ETH shorts.

Perhaps because Ethena Labs is advancing Arthur’s vision, the project has received strong support from Arthur in the previous two funding rounds. Arthur himself has minted a large amount of USDe and even publicly stated on the X platform, “USDe will surpass USDT to become the largest USD stablecoin.”

The biggest tagline for USDe is “Delta Neutral.”

In finance, Delta is an indicator used to measure the impact of underlying asset price changes on the portfolio. Its value ranges from “-1 to 1.” The definition of “Delta Neutral” is that if a portfolio consists of related financial products and its value is not affected by minor price changes in the underlying asset, the portfolio has the characteristic of being “Delta Neutral.”

Looking at the nature of USDe combined with its product, since the collateral assets for this stablecoin consist of an equal amount of spot ETH longs and futures ETH shorts, the Delta value of spot positions is “1,” the Delta value of futures shorts is “-1,” and the Delta value after hedging is “0,” thus achieving “Delta Neutral.”

The fundamental nature of “Delta Neutral” determines that the collateral positions for USDe are not significantly affected by minor price changes in ETH, thus (under normal circumstances) ensuring that USDe can always maintain a stable collateral situation.

The previous section introduced the collateral structure of USDe. So why did Ethena Labs choose such a complex design? And how can USDe capture market share from stablecoins like USDT and USDC that have been operating for a long time?

The answer lies in the yield. USDe pledging users can share dual yields from the collateral assets.

The first is stable income from spot ETH longs. Ethena Labs supports pledging spot ETH through liquidity staking protocols such as Lido, earning an annualized yield of 3% to 5%.

The second is unstable income from futures shorts funding rates. Users familiar with contracts understand the concept of funding rates. Although funding rates are volatile, for short positions, the majority of the time, the funding rate is positive in the long run, which means that overall returns will be positive.

The combination of these two yields has allowed USDe to achieve significant returns. Official data shows that Ethena Labs’ protocol yield and the yield of sUSDe (USDe staking certificate tokens) have been impressive in the past two months. The protocol yield has reached as high as 58.9% and as low as 10.99%, while sUSDe has reached as high as 87.55% and as low as 17.43%.

Currently, the real-time yield of sUSDe is 27.6%. Just think about the frenzy MakerDAO caused when it achieved an 8% yield using RWA. It’s not hard to understand why Arthur has so much confidence in USDe.

In October last year, Austin Campbell, a professor at Columbia Business School and the founder and managing partner of Zero Knowledge Consulting, wrote an article breaking down the design structure of USDe. In the article, Austin pointed out that he prefers to call USDe a “structured note” rather than a stablecoin, and he analyzed the four layers of potential risks for USDe:

First is the security risk of the collateral aspect, whether the security and sustainability of the collateral nodes can be guaranteed.

Second is the security risk of the futures contract opening platform, as both DEX and CEX are exposed to the risk of hacking attacks.

Third is the availability risk of the contract, as sometimes there may not be enough liquidity to short.

Fourth is the risk of funding rates. Although the funding rate for short positions is mostly positive, there is also a possibility of turning negative. If the comprehensive yield after weighted collateral returns is negative, it would be quite fatal for a “stablecoin.”

Currently, the real-time total issuance of USDe is $234 million, and it has maintained strong growth over the past few months.

It is worth mentioning that Ethena Labs has not publicly released its product yet, and access to USDe is currently by invitation only, making its performance even more remarkable.

Looking ahead, besides the just-completed $14 million funding round, there are several other key issues to pay attention to regarding Ethena Labs. One is the public release of the product and the disclosure of the related token economic model. Another is that Seraphim, the former “face” and expansion lead of Lido, has joined Ethena Labs as the Growth Lead, which may help drive product integration for Ethena Labs. The third is that Ethena Labs has been included in the first batch of incubation projects for Binance Labs’ Incubation Season 6, which may also be a significant boost for Ethena Labs’ accelerated growth.

The challengers in the stablecoin race have come and gone. We hope that this time, Ethena Labs and USDe will bring a different story.

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