What is Ethena?

Summary: Ethena is a synthetic dollar protocol on Ethereum that issues a decentralized stablecoin called USDe that is likened to an ‘Internet Bond’ for onchain markets. It utilizes a delta-hedging strategy against Ethereum collateral, ensuring USDe's stability and fostering a censorship-resistant, scalable financial ecosystem free from traditional banking systems.

With a Total Value Locked (TVL) of $1.9 billion and an impressive USDe yield of 35.4%, Ethena has attracted over 117.83K users and has quickly become one of the top protocols in DeFi.

What is Ethena?

Ethena is a synthetic dollar protocol on Ethereum that enables a stable, scalable, crypto-native currency, USDe, free from traditional banking dependencies. It employs delta-hedging with staked Ethereum collateral, ensuring USDe's stability and composability in DeFi. The protocol also introduces the 'Internet Bond,' leveraging yields from Ethereum staking and derivatives markets to offer a unique dollar-denominated savings instrument for users in compliant jurisdictions.

This initiative marks a significant stride in crypto finance, enabling censorship-resistant transactions and a novel savings mechanism. By utilizing onchain transparency and liquid staking derivatives, Ethena not only enhances the utility and efficiency of digital currencies but also contributes to Ethereum's evolution into a stable monetary asset, fostering broader adoption and capital inflow into the crypto ecosystem.

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How Does USDe Work on Ethena?

USDe operates through a sophisticated delta-hedging mechanism to maintain its peg stability, backed by Ethereum collateral. Here’s a technical overview of how it functions:

• Delta-Hedging Mechanism: USDe's value is stabilized through real-time, programmatic delta-neutral hedging. This involves taking opposite positions in the derivatives market equal in size to the Ethereum collateral, ensuring that the synthetic dollar's value remains stable irrespective of market fluctuations.
• Issuance and Redemption Process: Users can mint USDe by depositing staked Ethereum (stETH) and redeem it back, adjusting the supply to maintain its peg closely to the USD. This process is facilitated directly through Ethena Labs for parties who pass KYC/KYB checks, enabling controlled and compliant interaction.
• Yield Mechanisms: The protocol generates yield for USDe holders by leveraging the staked Ethereum rewards and the funding and basis spreads from its hedging positions. This dual-source yield contributes to the 'Internet Bond,' offering a dollar-denominated savings vehicle.
• Risk Mitigation and Transparency: Ethena Labs addresses operational, market, and smart contract risks through diversified hedging strategies and multiple custody solutions. It ensures transparency by providing onchain evidence of the backing assets and the hedging positions.

This structure allows USDe to offer a stable, scalable, and censorship-resistant currency, leveraging the Ethereum network and DeFi ecosystems to provide an innovative financial instrument for the crypto space.

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How Does Ethena Generate USDe Yields?

The yield on eUSD comes from two main sources, both designed to ensure sustainability and diversity in risk management:

• Staked Ethereum Rewards: Yield is generated from Ethereum's proof-of-stake model, including consensus layer inflationary rewards, execution layer fees, and MEV capture. These rewards are paid and denominated in ETH, with the yield percentage influenced by network activity and the amount of staked Ethereum.
• Funding and Basis Spread: Derived from delta hedging derivatives positions that Ethena Labs establishes when minting USDe. The positive funding rate and basis spread arise from the imbalance in demand for digital asset exposure, providing additional yield to those shorting this exposure. The rate of this yield varies annually based on market conditions.

By staking USDe for sUSDe, users partake in this yield mechanism. The "Token Vault" model ensures staked USDe directly generates yield without being rehypothecated. As a result, the value of sUSDe increases over time, reflecting the protocol's yield accumulation. 

This model ensures users benefit from the inherent yield generation of their staked assets, with sUSDe's value growing in relation to USDe as the protocol continues to deposit yields into the staking contract.

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Ethena Tokenomics

The Ethena token (ENA) tokenomics were announced at the end of the Ethena Shard Campaign, with a total supply of 15 billion ENA. The initial circulating supply is 1.425 billion. The allocation includes:

• Core Contributors: 30% of the ENA allocation goes to the team and advisors, with a 1-year lock-up and 3 years of monthly vesting thereafter.
• Investors: Investors’ tokens follow the same vesting schedule as core contributors to support the protocol's launch and Reserve Fund.
• Foundation: Uses its allocation to extend USDe's reach and reduce dependency on traditional finance and fiat-backed stablecoins through development, audits, and more.
• Ecosystem Development and Airdrops: 30% is reserved for ecosystem growth, including airdrops to users and funding for various initiatives like cross-chain partnerships, managed by a DAO with multisig control.

This structure aims to balance between incentivizing early contributors and ensuring a gradual release of tokens into the market to support ongoing development and ecosystem expansion.

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Ethena Airdrop

The Ethena Airdrop campaign, which wrapped up on April 1st, 2024, successfully distributed 750 million ENA tokens, representing 5% of its total supply. This was in reward to the community's engagement during the Shard Campaign. 

To qualify, participants were required to maintain or increase their USDe holdings until the campaign's conclusion. Significant wallet holders were subjected to a 50% vesting over six months. 

In addition, NFT holders from SchizoPosters and Redacted Remilio Babies collections received a dedicated 3% of the initial airdrop, equal to 0.15% of the total ENA supply, excluding holdings by two core contributors.

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Bottom Line

Ethena's introduction of USDe and the 'Internet Bond' on the Ethereum platform marks a significant advancement in decentralized finance. It offers a stable, scalable digital currency and a unique savings instrument, setting a new standard for financial innovation in the crypto space. By leveraging Ethereum's infrastructure and ensuring transparency and stability through delta-hedging, Ethena aims to attract more capital into DeFi and enhance financial empowerment and independence from traditional banking systems.