What is Ethena (ENA): is synthetic dollar USDe a DeFi revolution?

From decentralized exchanges exploring revenue sharing to Bitcoin Layer 2s establishing themselves as viable scaling solutions, the DeFi landscape is continuing to innovate and offer exciting alternatives to traditional financial systems. One key component of DeFi growth is the stablecoin — a cryptocurrency pegged to a fiat currency like the U.S. dollar. The inherent stability of stablecoins ultimately allows crypto enthusiasts to hold value without the wild price swings often associated with other cryptocurrencies.

While most stablecoins today are collateralized by real-world assets like cash or precious metals, Ethena (ENA) disrupts the scene by introducing its synthetic dollar, USDe. This innovative approach eliminates the need for centralized custodians holding real-world assets, potentially increasing transparency and efficiency within the DeFi space.

From uncovering what ENA is to explaining where its impressive yield comes from, we'll delve deeper into Ethena's synthetic dollar and its proposed Internet Bond with this in-depth guide.

What is Ethena?

Ethena is a DeFi protocol that disrupts the stablecoin scene with its synthetic dollar, USDe. Unlike traditional stablecoins like Tether and USDC that are backed by real dollars or assets held by centralized custodians, Ethena uses a clever combination of crypto asset backing and financial instruments to maintain a peg to the U.S. dollar.

This unique delta neutral hedging approach removes the need for centralized custodians, increasing transparency and efficiency within the DeFi ecosystem. By combining the funding and basis spread generated from short derivative positions with the yield earned from staked crypto assets, Ethena creates a unique on-chain savings instrument called the Internet Bond. The Internet Bond can function as a dollar-denominated savings option for users.

How USDe isn't a stablecoin

While some may consider this mere semantics, Ethena Labs founder Guy Young has explicitly stated that the team doesn't want to brand USDe as a stablecoin. As previously mentioned, USDe distinguishes itself from the usual collateralization present in fiat-backed stablecoins. This approach positions USDe as a synthetic dollar, aiming to achieve price stability through algorithmic and market-driven strategies, rather than relying solely on a fiat-based reserve of actual dollars. As Young himself mentions, Ethena Labs is "trying to build something with uncorrelated risk profiles" so as to avoid commingling with fiat money and detach itself from traditional financial systems.

How does Ethena work: explaining the USDe minting process

Ethena's magic lies in its innovative approach to maintaining its synthetic dollar peg. This is achieved through a sophisticated strategy of going long and short while remaining delta neutral. Here's a breakdown of the key factors involved.

USDe mechanics visual
The mechanics involved in creating Ethena's USDe. Source: ethena-labs.gitbook.io

When you mint USDe on the Ethena platform, it doesn't involve holding actual dollars in reserve. Instead, Ethena employs a five-step approach to generate and issue USDe to users:

  1. The minting process begins when users transfer their preferred form of collateral to Ethena.

  2. These backing assets are then transferred to a secure custodian for safekeeping. In Ethena's case, this refers to its off-exchange settlement provider custody account.

  3. Ethena's offchain server then decides on the most efficient funding to execute the short futures contract.

  4. Through these long and short positions, stability is achieved as the short derivatives position offsets the long spot collateral deposited on Ethena.

  5. USDe is then finally issued to users, which they can proceed to stake to benefit from the yield generated from Ethena.

Uncovering Ethena's Internet Bond and its attractive yield

Ethena doesn't just offer a USDe synthetic dollar, but also introduces a unique savings instrument called the Internet Bond. This new concept leverages the mechanisms behind USDe to provide users with the potential for high gains. Traditionally, bonds are like loans you make to companies or governments, and these entities pay you interest for the use of your money. With Ethena's Internet Bond, the story is similar since you're essentially lending your assets to Ethena in hopes of harnessing its delta hedging model on a grand scale. That means you're able to reap the benefits of natively generated staking yield and perpetual futures funding rates. As a result, Ethena can capture yield from various sources, including staked ETH and derivatives markets, and share it with Internet Bond holders.

Incentivizing community activity with Ethena's Sats

The Athena team introduced Sats to incentivize further interaction with the network. These Sats function like reward points earned through various actions within the Ethena ecosystem. Users can accumulate Sats by staking USDe, participating in liquidity pools, or even referring friends. Once earned, Sats can be converted to Ethena's governance token, granting holders a say in the protocol's future. This approach gamifies participation, encouraging users to contribute to the overall health and growth of Ethena.

By rewarding valuable actions, Ethena's Sats foster a more engaged community and create a win-win scenario for both DeFi users and the protocol. Do take note that the Sats earned per Epoch will decay with time, meaning early Ethena adopters will likely be awarded the most number of Sats. With more than 600 billion Sats already issued for the current Epoch, you'd best get started if you want a leg-up against other users.

The benefits and risks when using Ethena Protocol

Understandably, some crypto natives and newcomers have been skeptical about Ethena's recent success. From Ethena's staggering total value locked of more than $2,000,000,000 to average APYs of 23%, there's certainly a lot to consider when weighing the pros and cons of being an Ethena user. Before diving into Ethena's benefits and risks, here's a brief summary of what we'll cover.



Protection from centralized instability

Negative funding rates

Passive synthetic dollar gains

Smart contract risk

Blockchain transparency

Collateral liquidations

Potential benefits of using Ethena

Now that we understand the core of how Ethena works, let's explore why you might consider using it along with the risks surrounding Ethena's use.

  • Protection from centralized instability: Ethena operates on the blockchain, reducing reliance on centralized institutions like banks. This can be especially useful during times of fiat turmoil, like the recent U.S. bank runs that caused people to struggle to access their funds. By holding USDe and using Ethena's DeFi services, you potentially have more control and faster access to your assets, regardless of external factors impacting traditional financial institutions.

  • Passive synthetic dollar gains: With attractive double-digit yields through staking USDe, leveraging Ethena's innovative yield generation strategies can prove lucrative. This is especially so when compared to traditional savings accounts, as Ethena's APY leverages DeFi mechanisms to capture higher yields for its users in the long run.

  • Blockchain transparency: Ethena's reliance on blockchain technology promotes transparency within the system. Users can potentially track their assets and transactions on a public ledger, fostering a sense of trust and security.

Potential risks of using Ethena

While Ethena presents exciting possibilities, it's crucial to understand the inherent risks associated with DeFi protocols.

  • Negative funding rates: While USDe aims to maintain a peg with its goal of delta neutral stability, the underlying mechanisms are complex and could be impacted by significant market swings. This could be especially true when the price of ETH deviates significantly from its expected trajectory. In such scenarios, Ethena might experience negative funding rates on its short ETH futures contracts. Negative funding rates mean Ethena would have to pay additional fees to maintain its short position, potentially impacting the overall yield generated for users. Although an Ethena reserve fund exists for such funding risks, it's a challenge to definitely keep in mind when using Ethena.

  • Smart contract risk: Like many DeFi protocols, Ethena relies on smart contracts which contain automated code that autonomously governs its functionalities. If vulnerabilities exist in these contracts, they could be exploited by malicious actors, potentially leading to losses of deposited funds or unexpected behavior within the protocol.

  • Collateral liquidations: Given the volatility of the crypto markets, the value of Ethena's collateral for its short derivatives positions can fluctuate. If the value of Ether or Bitcoin drops significantly, Ethena's collateral could be liquidated to cover any shortfalls, resulting in potential losses for all users involved. Even though Ethena highlights that liquidation is unlikely, it's something to keep in mind in case of potential black swan events.

How to mint and stake USDe: beginning your Ethena journey

If you're interested in exploring the opportunities presented by Ethena, here's a quick walkthrough that covers how to mint USDe. Minting USDe on the Ethena platform involves interacting with the ecosystem's decentralized application (DApp), so we've come up with a general outline of the steps involved.

  1. Connect your crypto wallet: To start, you'll need a crypto wallet compatible with the Ethereum blockchain to interact with Ethena's DApp. Popular options include OKX Web3 Wallet, especially as OKX users enjoy 20% boosted Sats on locked USDe.

  2. Navigating to the minting interface: within the Ethena DApp, locate the section for minting USDe. This is labeled 'Buy'.

Buy USDe visual
Ethena's minting interface. Source: mirror.xyz

3. Specify the USDe amount: Indicate how much USDe you want to mint. Do take note of the usual slippages and gas fees associated with DEX transactions.

4. Collateral selection: Before starting the minting process, Ethena requires you to choose the asset you'll use as your backing asset. At the time of writing, this collateral can range from USDT and USDC to mkUSD and GHO.

5. Review and approve: Once the process above is complete, all that's left to do is carefully review the transaction details, including the amount of USDe minted, the collateral amount locked up, and any associated fees. Once satisfied, confirm the transaction within your connected crypto wallet.

USDe review and approve
Reviewing and approving your USDe stake. Source: mirror.xyz

6. Staking your USDe: With your newly minted USDe, head over to the 'Stake' section and enter the amount of USDe for staking. Once confirmed, users will then receive sUSDe in exchange for their USDe and begin to receive the protocol's generated yield. The staking rewards are paid through an increase in value of sUSDe.

Do take note that the value of 1 sUSDe might not be equal to 1 USDe. However, this is because sUSDe is expected to slowly increase in value as protocol yield is transferred into the staking smart contract. As a result, stakers might receive less sUSDe than USDe staked, but the value of the sUSDe will always be equal to or greater than the USDe you staked.

What is ENA? About Ethena's governance token

With all the talk about Ethena's synthetic dollar and Internet Bond, another important factor to understand is Ethena's governance token, ENA. According to Ethena Labs, ENA plays a crucial role in the protocol's future development.

ENA token holders have voting rights on key decisions that shape the Ethena ecosystem. This could include proposals for adding new collateral assets for minting USDe, distribution allocation between sUSDe and its reserve fund, or even introducing new features to Ethena as a DeFi protocol. By actively participating in governance, ENA holders can contribute to the growth and direction of Ethena. Additionally, locking ENA grants access to exclusive benefits like up to 50% higher yields when staking USDe in the form of bonus Sats.

ENA tokenomics

ENA tokenomics chart
Distribution of ENA tokens. Source: @ethena_labs on X.
ENA token distribution by quarter
ENA token distribution per recipient per quarter. Source: @ethena_labs on X.

Tokenomics wise, ENA has a maximum supply of 15,000,000,000, with 1,425,000,000 ENA tokens currently in circulation. This indicates a large portion of the total supply is yet to be distributed as only 9.5% of ENA tokens are circulating in the market. According to the distribution charts above, Ethena Labs has allocated 30% of the total ENA supply to ecosystem development and growth. This will likely be distributed to the Ethena community in the form Sats redemptions down the line and will be part of Ethena's way of rewarding early Ethena adopters who have supported the protocol by interacting with it.

What's notable is that ENA tokens will see a 13% token unlock at the start of Q2 2025. This unlock of about 2,000,000,000 ENA tokens will increase ENA's market cap by almost 150% as the unlock far exceeds the current circulating supply of ENA. A large portion of this ENA unlock will benefit early investors and the Ethena Labs team and could be a potential sign of volatility as the unlock date draws near.

Final words and next steps

Ethena presents a novel approach to stablecoins, offering a synthetic dollar within the DeFi landscape that attempts to right the wrongs of the Tera blockchain and its algorithmic stablecoin UST.

By applying a blend of crypto assets and derivatives to maintain a peg to the U.S. dollar, USDe is already leaps and bounds ahead when it comes to avoiding the dreaded death spiral. While commentators have been critical of the attractive yield generation capabilities of Ethena, only time will tell if these concerns are valid. From fears of negative funding rates during market volatility to smart contract vulnerabilities, reliance on the DeFi protocol is certainly not without its risks.

Ultimately, Ethena caters to crypto-curious individuals comfortable with a moderate to high risk tolerance who seek exposure to dollar-pegged assets within the DeFi ecosystem. With time, proper risk mitigation, and flawless execution, we may see predictions of Ethena's synthetic dollar overtaking Tether's USDT in market cap.

FAQs about Ethena

What is Ethena Protocol?

Ethena Protocol is a DeFi platform offering a synthetic dollar called USDe. Unlike traditional stablecoins pegged to fiat currencies, USDe employs a complex mechanism involving crypto asset collateral and futures contracts to maintain its peg to the U.S. dollar.

What is the Internet Bond?

Because of the mechanics behind the USDe's backing, Ethena can deliver protocol-level yield to those who offer their collateral to mint USDe. This system is known as the Internet Bond and can scale alongside the growth of USDe as a synthetic dollar.

What are ENA tokens used for?

ENA tokens are Ethena's governance tokens. Holding ENA grants voting rights on proposals that influence the direction of the protocol and offers bonus yields in the form of Ethena Sats when you lock ENA.

What are the fees associated with Ethena?

Ethena charges typical fees that you'd see on any Ethereum DApp for various actions within the protocol. This includes gas fees for when you're minting and redeeming USDe. You can find a detailed breakdown of fees on the Ethena website.

Is Ethena a secure platform?

Security is a top priority for Ethena. The protocol undergoes regular audits to identify and address potential vulnerabilities. However, it's important to remember that DeFi by its nature carries inherent risks beyond the control of individual protocols.

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