The ideas of Arthur Hayes
On May 12, 2022, after the collapse of Luna, Arthur Hayes, the co—founder of BitMEX and a very well—known person in the crypto world, published an essay entitled "Luna Brothers, Inc." In it, he described a stablecoin model that could avoid being tied to a traditional banking system like, for example, USDT. Here are quotes illustrating the formulation of the problem and the proposed solution:
"The most reliable crypto security is bitcoin. How can we turn bitcoin into a stablecoin with a reliable 1:1 peg to the US dollar? Many leading cryptocurrency derivatives exchanges offer perpetual reverse swaps and futures contracts. The base rate for them is BTC/USD, but they are margined by BTC. This means that profits, losses and margins are expressed in bitcoins, and the quoted price is in US dollars."
This means that cryptocurrency and derivatives for it become the base for a synthetic asset pegged to the dollar. In 2023, Hayes outlined his vision for such a stablecoin in even more detail in his work "Dust on Crust".
Ethena Implementation
Guy Young, the founder of Ethena, left his job after reading the essay "Luna Brothers, Inc." to bring Hayes' idea to life. It did not work out completely to follow in the footsteps: Ethena works on the basis of Ethereum, not Bitcoin. Nevertheless, Hayes himself supports the project and, according to him, has invested in USDe.
Ethena's self-definition sounds like this: a synthetic dollar protocol built on Ethereum, which will provide a cryptonative solution for money that does not depend on the infrastructure of the traditional banking system. At the same time, Ethena claims that they managed to get away from other extremes inherent in decentralized stablecoins — low scalability and stability. It turns out that Ethena positions itself as a project that was able to avoid the disadvantages inherent in both centralized and decentralized stablecoins.
Whether this is really the case, you can find out by analyzing the USDe token and looking at the discussion in the crypto community accompanying Ethena.
What is USDe?
The USDe token is a delta-neutral stablecoin trading 1:1 with the US dollar. Delta neutrality, as understood by Ethena, assumes that hedging the risk of a change in the price of a collateral asset in the same amount ensures that a change in the value of the collateral asset will be offset by a change in the value of the hedging part. Thus, the company wants to achieve a stable USDe-dollar peg that would be protected from market fluctuations.
It is noteworthy that Ethena avoids the name "stablecoin" in relation to the USDe, preferring instead the "synthetic dollar". But within the framework of this material, we will nevertheless refrain from the proposed newspeak and will call USDe a stablecoin — which is what it is by nature. Ethena probably insists on a different name for a reason. Other decentralized stablecoins have not performed very well — just remember Terra and Luna. Therefore, the question of whether the USDe will repeat their fate remains open.
Even if it repeats, we are still at the stage of promising dizzying successes: the declared annual return from USDe staking is 37.1% today. At certain points, it rose to an even more immodest 67%. At the same time, delays in payments have already been noted, but Ethena reassures: the reduction in payments for sUSDe (USDe in staking) was done to ensure a slow and controlled deployment of the product, and unpaid income will be stored in the protocol and transferred to the owners later. You can read more about the mechanism for calculating remuneration here.
The major exchanges — Binance, Bybit, Bitget, Deribit and OKX — seem to be happy to work with Ethena. In addition to listing Ethena tokens, the project gets access to the futures market through the same exchanges.
So far, everything we've heard from the Ethena team itself can be described as "too good to be true."
Why this might be controversial
There are plenty of reasons to doubt Ethena. A recent discussion in MakerDAO about the allocation of 600 million DAI stablecoins for the USDe raised the issue of Ethena's trust with an edge. Many people who are able to draw conclusions from past mistakes made in the crypto world warn MakerDAO against integration with a project that raises reasonable doubts. Yes, direct statements that Ethena is a scam or that the project is doomed to failure are usually not made, but many express reasonable concern.
The MakerDAO forum even presented several detailed expert opinions (the first and second conclusions), which called for caution regarding Ethena. There are many weaknesses in the architecture of the project: for example, Ethena interacts with a large number of counterparties (centralized exchanges, off-chain custodians, third-party DeFi protocols, oracles), which creates many potential vulnerabilities. The procedure of mining and redemption of USDe also raises doubts. And this is all in addition to the risks associated with regulation and market volatility, which are traditional for stablecoins. Suspiciously, a lot of things happen outside the blockchain and even outside the exchange, with the participation of dubious custodian agents. Thus, the solution of the decentralization issue announced by the project is controversial. As well as the calculation of ensuring the component of "stability" in value due to low liquidity. You can read more about the emission mechanism here.
Considering that we are talking about the top 3 (DAI) and top 5 (USDe) stablecoins by capitalization, if something goes wrong with Ethena, it will cause a huge stir. However, the crypto world is no stranger to this.
Another alarming signal may be posts from investors on social networks that their plan for Ethena boils down to a "farm it and dump it" strategy, which can be translated as "get short-term profit and quit the project."
Conclusion
Contrary to the rosy picture that the growth of Ethena's capitalization and the company's self-praise of its USDe token paints, there are actually many reasons for skepticism. There are still questions about decentralization, liquidity, the mechanism of formation and payment of remuneration, and so on. Therefore, the DYOR strategy is most appropriate. Moreover, past events in the crypto world teach that the more dizzying the success and the greater the profitability of a project, the more reason to doubt it.
This material and the information in it do not constitute an individual or other investment recommendation. The editorial board's opinion may not coincide with the opinions of the author, analytical portals and experts.