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Fans of the Ethena Lab’s stablecoin USDe — which offers a mouthwatering 35% APY — are also enjoying an airdrop of the governance token ENA.
Ethereum-based stablecoin protocol Ethena Labs launched USDe in February 2024, and on April 2, 2024, Ethena distributed its governance token, called ENA, to USDe holders, stakers, and liquidity providers.
In this article, we explain what Ethena Labs is and how Ethena Labs is paying USDe stakers 35% yield (as of April 2, 2024). We also decipher the USDe risks involved and how to become eligible for the next ENA airdrop.
Ethena and How USDe Works
Ethena Labs is a stablecoin protocol built on Ethereum. The project was founded by Guy Young in 2023.
According to valuation tracker Tracxn, Ethena Labs has raised over $20 million over two rounds of funding participated by Franklin Templeton, DragonFly, Kraken, Maelstrom, and others. Arthur Hayes, co-founder of the BitMex crypto exchange, was an angel investor in Ethena.
Ethena says its product, USDe, is not the same as a fiat stablecoin like USDC or USDT. Instead, Ethena calls USDe a “synthetic dollar” that is censorship-resistant and fully backed on-chain.
USDe is backed by staked ETH. In order to maintain its dollar peg, USDe uses short ETH hedges on exchanges to achieve a delta-neutral approximate dollar position.
USDe holders can stake their tokens to get a yield-bearing token called sUSDe. Ethena calls this instrument the “internet bond.” sUSDe accrues value from the underlying staked ETH and the funding rate earned from short ETH positions.
As of April 2, 2024, sUSDe’s trailing one-week daily average yield stood at 35.4% APY, according to Ethena’s website.
Ethena Labs said of the mechanism: “The ‘Internet Bond’ will combine yield derived from staked Ethereum as well as the funding & basis spread from perpetual and futures’ markets, to create the first on-chain crypto-native ‘bond’ that can function as a dollar-denominated savings instrument for users in permitted jurisdictions.”
How to get USDe?
Whitelisted approved participant market makers can mint USDe on Ethena’s website by depositing liquid staking token (LST) collaterals such as stETH.
Non-whitelisted users can exchange their stablecoins for USDe on Ethena’s website. As of April 2, 2024, users can exchange USDT, USDC, DAI, GHO, crvUSD and mkUSD for USDe.
You can also buy USDe on decentralized exchanges Uniswap and Curve and ByBit, Bitget, and KuCoin on centralized exchanges.
How is Ethena Paying High Yield to sUSDe Holders?
sUSDe is Staked USDe, and the yield generated for those positions, according to Ethena, is generated from two sources:
- Staked ETH rewards.
- Funding and basis spread earned from delta hedging derivatives positions.
Staked ETH rewards comprise of:
- Consensus layer inflationary rewards.
- Execution layer fees paid to Ethereum stakers.
- MEV capture paid to Ethereum stakers.
Founder Guy Young, in conversation with the Empire Podcast, said:
“Of the composition of returns right now for sUSDe, less than 5% is coming from staked ETH returns. The reason it’s actually there is for more of a bear market, and if you do get to zero or negative funding.
“That [staked ETH] is actually our first line of defense, which is you got a positive interest rate to cover some of that (zero or negative funding rates).”
Meanwhile, to earn funding and basis spread, Ethena opens corresponding short derivatives positions to hedge the delta of the received assets whenever minters provide collateral cryptocurrencies to mint USDe.
“Historically, due to the mismatch between demand & supply for exposure to digital assets, there has been a positive funding rate & basis spread earned by participants who are short this delta exposure,” said Ethena Labs.
Ethena Labs added this strategy yielded about 18% APY in 2021, about -0.6% APY in 2022, and about 7% APY in 2023 on a volume-weighted basis.
USDe supply $1,500,000,000@ethena_labs now 15% of global ETH open interest
Would be a shame if we launched BTC next week, don't you think? pic.twitter.com/Kw8qZRSids
— Ethena Labs (@ethena_labs) March 29, 2024
Ethena Risks: What are the Risks for USDe Holders?
Ethena’s offer of high yield on staked USDe has attracted criticism from the crypto community, some of whom have compared sUSDe to Terra’s collapsed algorithmic stablecoin TerraUSD (UST). At the time of its collapse in 2022, Terra-affiliated Anchor Protocol offered an “unsustainable” near 20% APY on UST deposits.
However, Young, in conversation with CoinDesk, said that sUSDe yield will always depend on the present market environment while UST’s yield was “artificially set and funded by developer firm Terraform’s treasury.”
Nevertheless, it helps to learn about the potential risks for USDe holders.
1. Funding risk
Ethena uses perpetual contracts to take short ETH positions as a hedge against the staked ETH deposits that back USDe.
Traders of perpetual contracts have to deal with a funding rate mechanism that aims to keep the price of perpetual contracts aligned with spot prices. In order to incentivize traders to take positions that bring these two prices together, perpetual contracts must pay a funding rate.
When the price of perpetual contracts is lower than the spot prices, short pay longs the funding amount, and vice versa. The scenario where shorts pay longs the funding amount is called negative funding rate.
Therefore, Ethena (who takes up a short position) will not earn yield from funding and will instead have to pay funding if negative funding rates persist.
According to Ethena, it has set up a reserve fund to step in on such occasions.
2. Liquidation Risk
Ethena takes up short ETH positions on several centralized exchanges – Binance, ByBit, OKX, Deribit, Bitget, and BitMEX.
Exchanges have the discretion to forcibly close positions if a trader does not have sufficient collateral to meet margin requirements.
3. Custodial Risk
Ethena relies on custodians to manage its collateral for perpetual hedging positions and for off-exchange settlement. Operational failures, insolvencies, and hacks at Ethena’s crypto custodians remain a key risk.
4. Exchange Failure Risk
As mentioned above, Ethena takes up short ETH positions via perps on several CEXs. If a CEX were to fail, Ethena will be forced to re-enter short positions incurring trading costs.
It should be noted that Ethena will not lose its collateral (used to take up short positions) due to off-exchange settlement provided by custodians. However, Ethena will lose out on any unrealized profit made from funding rates on the failed exchange.
5. LST Collateral Risk
USDe is backed by LSTs like stETH therefore market confidence in LST is “paramount” for Ethena.
The loss of confidence in LSTs due to hacks, operational issues and smart contract bugs will directly affect the collateral value of USDe.
When is the Next ENA Airdrop? And How to Become Eligible?
On April 1, 2024, Ethena announced its second season of ENA airdrop called “Sats Campaign” to mark the protocol’s onboarding of Bitcoin (BTC) as a backing asset, alongside staked ETH.
ENA airdrop hopefuls can collect airdrop points called “Sats” through various actions on different protocols. Here are the details:
- Ethena
- Lock USDe – Earn 20 Sats per day per USDe.
- Buy and hold USDe – Earn 5 Sats per day per USDe.
- Stake and hold USDe – Earn 2 Sats per day per USDe.
- Pendle
- Hold USDe yield token (YT) or liquidity pool token (LP) on Pendle – Earn 20 Sats per day per USDe held.
- Hold sUSDe YT or LP on Pendle – Earn 5 Sats per day per USDe held.
- Liquidity pools
- Provide liquidity and lock LP tokens on Merchant Moe – Earn 20 Sats per USDe
- Layer 2
- Stake USDe on Zircuit – Earn 15 Sats per day per USDe
- Stake USDe on Injective Mito Vault – Earn 15 Sats per day per USDe
- Money Markets
- Deposit collateral and borrow USDe on Morpho – Earn 20 Sats per day per USDe
- Deposit collateral and borrow sUSDe on Morpho – Earn 5 Sats per day per USDe
- Leverage farm USDe on Gearbox – Earn 20 Sats per day per USDe
- Leverage farm sUSDe on Gearbox – Earn 5 Sats per day per USDe
The second season to farm ENA airdrop points will end on September 2, 2024 or until USDe supply hits $5 billion, whichever happens first.
At the time of writing, USDe’s market cap stood at over $1.7 billion.
Epoch 1 Season 2:@ethena_labs x @eigenlayer x @0xMantle x @pendle_fi pic.twitter.com/Lk2HPgX5Id
— Ethena Labs (@ethena_labs) April 2, 2024
The Bottom Line
A new stablecoin enters the field. Let’s see if this new take on stable currency works.
Remember that no crypto investment is without risk. Always conduct your own research before farming Ethena ENA airdrop points or staking USDe to earn the yields offered on the platform.
Never invest more money than you can afford to lose, and this article should not be considered investment advice and is for information purposes only.
