Ethena raises $14m funding round and launches stablecoin with 23% yield

Some of crypto’s largest funds and exchanges are betting on a new dollar-pegged stablecoin backed entirely by Ether and Ether derivatives.

Ethena Labs, the company behind the new USDe stablecoin and a yield-bearing version called sUSDe, has raised $14 million in a round that includes crypto venture capital firms Dragonfly, Brevan Howard Digital, and Avon Ventures. An Ethena spokesperson noted that the Brevan Howard funding deal has not closed.

Crypto derivatives exchanges Binance, Bybit, OKX, Deribit, Gemini, and Kraken participated in an earlier $6 million round led by Dragonfly and Arthur Hayes, the founder of crypto exchange BitMEX.

Select investors have been able to mint USDe since December.

Beginning today, any investor outside the US, Russia, and more than two dozen smaller countries will be able to mint the stablecoin.

USDe will try to break into a highly competitive — and lucrative — field. Stablecoins are among the most popular real-world applications of crypto technology.

They have also been a cash cow for issuers like Tether, who’ve backed their tokens with US Treasuries.

Tether posted a net operating profit of more than $6 billion in 2023.

Mass-market stablecoin

Ethena founder Guy Young doesn’t expect USDe to leapfrog Tether’s USDT or Circle’s USDC, which have a combined market capitalisation of just under $125 billion.

The goal is to create a mass-market stablecoin backed by Ether and versions of staked Ether, rather than real-world assets such as cash and US Treasuries.

“We are definitely not as decentralised as stuff like Liquity,” Young told DL News.

“[We’re] not trying to create something that’s perfectly decentralised. What you’re trying to do is just remove collateral from the US banking system and put it into the crypto ecosystem.”

Liquity is the company behind the LUSD stablecoin.

USDe’s mass-market launch will include integrations with DeFi protocols such as Synthetix, Curve, Convex, and Aave.

Natural constraints

Other stablecoins, like LUSD and RAI, only accept Ether as collateral. And forthcoming versions of both will accept Ether derivatives like Lido’s stETH.

To protect against the volatility of Ether and hold their pegs, existing Ether-backed stablecoins require over-collateralisation: For every $1 of the stablecoin a user borrows, they must deposit more than $1 in Ether.

That limits how much a user can borrow and how big the stablecoin can grow.

Using a complicated trading strategy, Ethena lets users mint $1 in USDe for about $1.05 worth of Ether.

‘We basically want to be within the top three stablecoins’

—  Guy Young

This should create a stablecoin that can expand to a market capitalisation of $5 billion to $10 billion — much larger than existing Ether-backed competitors, according to Young.

“We basically want to be within the top three stablecoins,” Young said. “I don’t think we’ll ever be able to get as big as something like USDC or USDT, just because there’s natural constraints around how big this product can get, because it relies on the derivative market within crypto being a certain size.”

At the same time, it should provide a more decentralised alternative to USDC and USDT, which rely on assets held at banks, which are subject to government oversight and regulation — in other words, the institutions to which crypto was meant to provide an alternative.

“Stablecoins are the most important instrument across the entire space,” Young said. “It’s a complete joke that DeFi runs literally 100% on centralised stablecoins.”

Unlike LUSD or RAI, however, it will rely on old-fashioned businesses for certain functions.

Custodians with experience managing crypto, such as Fireblocks and BitGo, have been tapped to hold customer deposits, for example.

“There’s huge centralised components to what we’re doing,” he said.

Since it became available to some investors in December, USDe’s market capitalisation has topped $225 million, making it one of the 12 largest stablecoins, according to DefiLlama data.

Internet bond

Investors can lock up their USDe to create a yield-bearing token that Ethena has likened to an “internet bond,” called sUSDe.

As of Thursday, the annual yield on sUSDe was a whopping 23%, a figure that recalls the heady days of the Terra stablecoin. Terra imploded in May 2022.

Terra’s co-founder, Do Kwon, is currently jailed in Montenegro, awaiting the results of a retrial that could see him extradited to either the US or South Korea. Prosecutors in those countries want to prosecute him for his role in the collapsed ecosystem.

Ethena is not an algorithmic stablecoin like Terra.

Some of Ethena’s yield comes from staked Ether. As of Thursday, the yield for staking Ether was just under 4% and is expected to fall as more people stake their Ether.

The rest comes from the trading strategy that helps keep USDe at peg: Opening short derivatives positions on centralised exchanges to offset the long spot positions represented by users’ deposited assets.

“It’s definitely cyclical through the market cycles,” Young said of the yield. At the bottom of a bear market, it would likely be near zero, as in 2022. “And then it gets pretty crazy, to 20% to 30% when things are properly heated.”

He said that he expects this to remain a competitive advantage over other stablecoins.

“The lesson that we got from Anchor… was, the demand for $1 which can return higher yield than the rest of the market by a few hundred basis points is not a billion dollars. It’s like 20 [billion],” he said, referring to the Terra-affiliated protocol that generated the failed stablecoin’s now-infamous 20% yield.

“It didn’t matter how much risk was sitting there within Terra and Anchor, $20 billion went in there because there was a slightly higher yield.”

Correction: Ethena corrected its announcement to remove Franklin Templeton and PayPal Ventures, which are not participating in the funding round, and to clarify that Binance, Bybit, OKX, Deribit, Gemini, and Kraken participated in the company’s previous fund raise.

Correction: Ethena also clarified that the Brevan Howard deal has not yet closed.

Aleks Gilbert is a New York based reporter covering DeFi. Got a tip? Email him at aleks@dlnews.com.