Ethena: A Novel Approach to Building a Robust Stablecoin Protocol

1/ In this session from REDeFiNE TOMORROW 2024, Guy Young @leptokurtic_, Founder of Ethena Labs @ethena_labs, discussed the vision and architecture behind Ethena, a novel stablecoin protocol, with Min Teo @_MinTeo, Managing Partner & Co-founder at Ethereal Ventures @etherealvc.
2/ Ethena aims to create a crypto-native dollar disconnected from the legacy banking system. It uses crypto assets like staked ETH as collateral and perpetual swaps for hedging to produce a synthetic dollar.
3/ Users interact with Ethena by swapping assets into USD on external markets. Arbitrage opportunities arise when the price of USDe is imbalanced, similar to the minting and redeeming process with centralized stablecoins.
4/ Ethena generates returns from the positive carry of staked ETH and the basis in futures markets. These two forms of scalable yield in crypto are tokenized into USD, which can be staked to capture the yield through a second token called sUSD.
5/ Exchanges play a crucial role in Ethena's distribution. Ethena is now the largest client for most exchanges in terms of flows and size. The protocol's growth benefits exchanges through fee opportunities and healthier derivative markets.
6/ Ethena plans to bring more elements of the protocol on-chain over time, including incubating decentralized exchanges to bootstrap liquidity and move flows on-chain.
7/ Addressing comparisons to Terra, Guy highlighted that Ethena's collateral is exogenous to the system, with USD fully backed 1:1 and slightly over-collateralized. Ethena is more comparable to MakerDAO, with differences in collateralization ratios due to hedging.
8/ The Athena token has gained significant momentum, becoming one of the most watched tokens on Ethereum. Guy shared insights on managing a token holder community, emphasizing treating users fairly and rewarding early supporters.
9/ Future plans for Athena include expanding USD integrations in DeFi, CeFi (e.g., using USD as collateral on Bybit), and attracting allocators from traditional finance. USDe's yield has a weak negative correlation to real-world rates, making it compelling in different rate environments.
10/ Athena also aims to build a chain around the protocol, with USDe as the core asset and gas token. The vision is for USDe to be the lifeblood for financial applications, attracting developers to build around the high-yield dollar.
11/ Regarding collateral options, Ethena is focused on growing BTC and ETH exposure before potentially adding other assets like SOL. The decision depends on the depth of the derivative market around the asset.
12/ Guy believes that producing crypto-native products with unique returns is key to bringing net new capital into the ecosystem, rather than replicating traditional finance products on-chain.
13/ He identified security and compliance with KYC/AML frameworks as major challenges for institutional capital to enter DeFi. Default rates in DeFi are unacceptable for the current level of capital, and pseudonymous interactions in AMMs are not compliant with real-world regulations.