In today's rapidly developing cryptocurrency market, Ethena, as a synthetic USD stablecoin protocol, is attracting more and more attention with its unique mechanism and design. Ethena’s synthetic U.S. dollar USDe provides a censorship-resistant, scalable and stable native solution for funding via delta-hedged Ethereum. This article will deeply explore Ethena’s operating model, advantages and future development potential.
Basic concepts of Ethena
Ethena is essentially an open-end hedge fund that utilizes liquidity staked ETH tokens as collateral and shorts an equal amount of ETH to create a delta-0 portfolio. This configuration ensures that the net value of the assets held by Ethena does not fluctuate with changes in the underlying value of the assets, while also earning income from ETH pledges and financing payments for short positions.
Collateral protection mechanism: In order to protect users’ collateral, Ethena (ENA) adopts an over-the-counter settlement (OES) solution. The funds are held by a reputable third-party custodian, and only the account balance is mapped to the centralized exchange (CEX) to provide trading margin. This design ensures that user funds are never deposited into a centralized exchange, thereby reducing the risk of assets being stolen or lost.
How Ethena works
USDe’s peg mechanism: USDe, the stable currency issued by Ethena, is designed to be pegged to the U.S. dollar at 1:1. Ethena introduces various Authorized Participants (APs), enabling it to mint and destroy USDe at a 1:1 USD ratio. This mechanism ensures the stability and liquidity of USDe.
Minting and burning process: The core of the minting process is the acceptance of assets such as stETH Lido, Mantle mETH, Binance WBETH and ETH. Ethena automatically sells ETH/USD perpetual swaps to lock in the USD value of ETH or ETH LSD. The protocol then mints an equal amount of USDe to match the value of the USD that the shorts are permanently hedging.
Coinage examples
Assume the AP deposits 1 stETH, worth $10,000. Ethena sells 10,000 ETH/USD per swap contract, which is $10,000 per $1 contract value. AP thus receives 10,000 USDe because Ethena sold 10,000 ETH/USD per swap contract.
The destruction process is equally important. After AP deposits USDe into Ethena, Ethena automatically covers part of its short ETH/USD perpetual swap position, thereby unlocking a certain amount of USD value. The protocol will then destroy the USDe and return an amount of ETH or ETH LSD based on the total USD value unlocked minus execution fees.
Destroy example
If AP deposits 10,000 USDe, Ethena will buy back 10,000 ETH/USD for each swap contract, which is 10,000 USD/1 USD contract value. The AP will receive 1 stETH calculated as 10,000 * $1 / $10,000 stETH/USD minus the execution fee.
Ethena’s Advantages: High Capital Efficiency: Ethena’s (ENA) capital efficiency is comparable to USD asset-backed stablecoins such as USDC and USDT, while also avoiding reliance on traditional financial markets. This design allows Ethena to provide greater flexibility and censorship resistance in the cryptocurrency market.
Scalability and Diversity
Although Ethena’s current model only uses pledged ETH as collateral, BTC may be used as collateral in the future to achieve larger scale expansion. While doing so may dilute USDe’s earnings since BTC collateral does not generate staking earnings, it also provides Ethena with more opportunities for growth.
Censorship resistance: Ethena’s design philosophy emphasizes censorship resistance, allowing users to enjoy higher privacy and security when using the protocol. This has important implications for users who wish to remain anonymous in the cryptocurrency market.
future outlook
As the cryptocurrency market continues to evolve, Ethena is expected to take its place in the stablecoin space. Its unique synthetic dollar mechanism and high capital efficiency set it apart from its competitors. In the future, Ethena may continue to expand its collateral types and further enhance its market competitiveness.
Overall, Ethena is not only an innovative synthetic USD stablecoin protocol, but also a financial instrument with huge potential. As user demand for decentralized finance (DeFi) products increases, the future development of Ethena is worth looking forward to. We will continue to pay attention to the dynamics of Ethena and look forward to it bringing more innovation and changes to the cryptocurrency market.