Ethena Labs contends that markets outside the United States can explore new opportunities with financial instruments pegged to the U.S. dollar.
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For markets outside of the US, dollar-denominated financial instruments present a new opportunity. That is Ethena Labs’ wager, a business that has raised $14 million to develop a synthetic dollar based on Ethereum.
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The funding was revealed by Ethena’s team on February 16 and was provided, among other investors, by Dragonfly, a venture capital firm. The business received $6 million from Binance Labs, Gemini, Bybit, OKX Ventures, Mirana Ventures, and Deribit in an earlier funding round in 2023 to establish decentralized finance systems based on the Ethereum network.
With staked Ether serving as collateral, the money will underpin the USDe, a synthetic dollar backed by delta-hedging techniques. DefiLlama data indicates that since the product’s inception in December, $200 million worth of value has been locked into it.
The company clarified in a statement, “USDe achieves its approximate peg to the U.S. dollar by utilizing delta-hedging on assets from users who mint USDe against short-staked Ethereum collateral, employing perpetual swaps to attain ‘delta-neutral’ stability.”
Put in a different context, USDe uses a variety of hedging techniques to keep its peg to the US dollar. It takes a different approach from traditional stablecoins, which employ direct collateral or computational ways to maintain its value, by using financial derivatives like arbitrage and perpetual swaps contracts to guarantee that the value of the digital currency stays constant with respect to the dollar.
In spite of issuers fully internalizing the yield, Guy Young, CEO of Ethena Labs, stated, “We view stablecoins as the single most important instrument within crypto and the only idea which has found true product market fit, with over $130bn of global demand.”
For example, Tether Holdings Limited, the largest stablecoin issuer, reported a “record-breaking net profit” of $2.85 billion in the final quarter of 2023, fueled by yields from its Tether
“The reliance of the entire sector on centralized stablecoins, whose collateral backing is held within the banking system, highlights the creation of a crypto-native synthetic dollar alternative as, in our opinion, the most significant opportunity in the field.”
However, the synthetic dollar is not risk-free only because it has delta-hedging. In times of market stress and unanticipated developments, counterparty risks and liquidity are always there. The startup says that in order to reduce these risks, institutional grade companies like Fireblocks, Copper, and Bitgo are holding and settling the collateral.
Tom Schmidt, general partner at Dragonfly, referred to the synthetic product as the “holy grail of crypto dollars.” He said, “Stablecoins have grown massively in popularity over the past few years by providing access to USD-denominated savings and remittances for people around the world, but they’ve always been handicapped by one of these three issues [stability, censorship, and capital efficiency].”
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