The Innovation and Challenges of Synthetic Dollar Stablecoin USDe

USDe is a synthetic dollar stablecoin that lies between centralized and decentralized systems. It maintains stability and generates returns through on-chain asset custody and Delta-neutral strategies. This innovative model seeks a balance between the DeFi and CeFi markets, attempting to address some issues present in the existing stablecoin market.

The Operating Mechanism of USDe

Users mint USDe by depositing stETH at a 1:1 ratio to USD. The deposited stETH is sent to a third-party custodian and the balance is mapped to the exchange through the "over-the-counter settlement" (OES) method. Ethena then opens a short position in ETH perpetual contracts on a centralized exchange to ensure that the collateral value remains delta neutral or unchanged in USD.

Ordinary users can obtain USDe in external liquidity pools, while vetted institutions can directly mint and redeem USDe through the Ethena contract. This structure ensures that assets are always held in a transparent on-chain custody address, reducing the risks associated with traditional banking infrastructure and exchanges.

OES - Innovative Fund Custody Method

OES utilizes multi-party computation (MPC) technology to construct custody addresses, allowing for the use of funds in collaboration with centralized exchanges while maintaining transparency on the blockchain. This method ensures decentralized management of assets while also benefiting from the liquidity advantages of centralized exchanges.

Sources of Income

The yield of USDe mainly comes from two aspects:

1. Ethereum staking yields brought by ETH liquidity derivatives
2. The funding fee income obtained from opening a short position on the exchange and the basis trading income

This diversified yield strategy offers higher potential returns for USD holders.

Yield and Sustainability

The yield of USDe once reached a high level, but has declined with market changes. The volatility of the yield reflects the model's dependence on the conditions of centralized exchange futures markets. Future yields may be limited by market size and trading activity.

Scalability Analysis

The scalability of USDe is mainly limited by the total open interest of the perpetual contracts in the ETH and BTC markets (Open Interest). Although the issuance of USDe has significantly increased recently, its further expansion may face constraints from market capacity.

Potential Risks

1. Funding rate risk: Insufficient market bullishness or excessive issuance of USD may lead to negative returns.
2. Custody risk: Reliance on OES and centralized institutional services.
3. Liquidity Risk: Large-scale capital operations may face insufficient liquidity.
4. Asset anchoring risk: The anchoring relationship between stETH and ETH may experience fluctuations.

To address these risks, Ethena has established an insurance fund to accumulate capital through the distribution of protocol revenue.

Overall, USDe has demonstrated innovative attempts in the stablecoin sector, but its long-term development still faces many challenges and uncertainties. Market participants need to closely monitor its development trends and potential risks.