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Ethena Labs will start purchasing and shorting bitcoin as part of a cash-and-carry trade in a move that developers say will create a “safer” USDe synthetic dollar product for users.
The controversial platform is currently generating an annual yield of 37% (a seven-day rolling average that can change) by shorting ether futures and pocketing funding rates since its January rollout.
Funding rates are periodic payments either to traders that are long or short based on the difference between perpetual contract markets and spot prices.
While such a strategy has attracted detractors, demand has continued to grow — as over $2 billion in USDe, its synthetic dollar, has been issued since its release. USDe is supposed to maintain a $1 peg at all times, mimicking a stablecoin but with a different backing mechanism.
Developers say adding bitcoin to the mix will boost user yields while helping USDe issuance grow further.
“After the unprecedented growth or USDe since launch, Ethena hedges represent ~20% of ETH open interest as of today,” Ethena developers said in an X post. “With $25bn of BTC open interest readily available for Ethena to delta hedge, the capacity for USDe to scale has increased >2.5x.”
“BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity. As Ethena scales closer to $10bn this provides a more robust backing, and ultimately a safer product for users,” they added.
While BTC does not possess a native staking yield like staked ETH, staking yields of 3-4% are less significant in a bull market when funding rates are >30%
The current environment is ideal for optimizing for the scalability of USDe pic.twitter.com/0AwrfL85ry
— Ethena Labs (@ethena_labs) April 4, 2024
How Ethena Works
On Ethena, users can deposit stablecoins such as tether (USDT), frax (FRAX), dai (DAI), Curve USD (crvUSD) and mkUSD to receive Ethena’s USDe, which can then be staked. Unstaking takes seven days. The staked USDe tokens can be supplied to other DeFi platforms to earn additional yield.
It uses a futures mechanism similar to a “cash and carry" trade, in which a trader takes a long position in an asset while concurrently selling the underlying derivative. Such a trade, in theory, is directionally neutral and earns money from funding payouts instead of the underlying asset’s price movement.
Here's how it works: First, someone mints USDe with some amount of money, say $10 million tether (USDT). Ethena then exchanges this USDT for BTC. However, because bitcoin’s value can swing wildly, there is a further step to stabilize the value of USDe.
Ethena then shorts or bets again on $10 million worth of BTC perpetual futures contracts. If BTC's price drops by 20%, for example, the losses from holding BTC are balanced out by the gains from the short position in BTC perps, keeping the overall value stable.
This combination of holding BTC while also shorting it effectively creates USDe. Plus, by shorting BTC, they earn a funding yield that is paid out to users.
Ethena’s ENA tokens are down 8% in the past 24 hours, data shows, alongside a slight market selloff.
