Inspired by Arthur Hayes and supported by multiple CEX, what are the innovations of the decentralized stablecoin protocol Ethena?

Author: Leo

The emergence of Ethena may bring about a new revolution in stablecoins. It does not have auditable US Treasury collateral held in bank accounts and has encrypted collateral that is independent of traditional finance. Ethena not only provides scalable on-chain stablecoins, but also enables ETH to transform into globally accessible and permissionless Internet Bonds.

Earlier this year, Arthur Hayes published an article titled “A Shell on Dust – Creating Bitcoin-based Stablecoins.” The general idea is that the current stablecoin systems in the crypto industry rely too much on banks and are not fully decentralized. The article also mentioned a new type of BTC-based stablecoin, which truly achieves decentralization for stablecoins.

Cryptocurrency Stablecoins Bound by Banks

In the article, Arthur mentioned a crucial issue. Stablecoins have always been the most important medium between the crypto world and the traditional world, but they also have many vulnerabilities and crises. Firstly, cryptocurrency transactions cannot avoid fiat currencies, especially the US dollar. As the most important reserve currency globally, the transactions between the US dollar and cryptocurrencies are very significant. The industry needs a platform that custodies cryptocurrency and facilitates transactions with the US dollar. However, the core of decentralized finance is financial operations that do not rely on the banking system. Therefore, most banks do not like to be involved with cryptocurrencies (of course, banks seeking high returns will engage in crypto businesses). Additionally, the current Western banking system is not compatible with the crypto industry. Apart from this, crypto-friendly banks also need to make various preparations, such as audits, operations, regulations, etc., before they can start crypto businesses. However, if there is increased pressure from US regulatory agencies or the industry is filled with FUD (fear, uncertainty, and doubt), the liquidity of banks in the crypto industry can easily be shattered and disappear due to external factors, just like the case of Silvergate.

Because the Western banking system cannot facilitate the quick and cost-effective transfer of funds in the crypto industry, whether it is transferring funds between internal account holders or between external banks. Moreover, the banking industry is an oligopoly protected by government franchises. Banks will not make efforts to make such transactions faster or cheaper. However, the crypto industry definitely needs stablecoins. Traders need to trade assets faster between the US dollar and cryptocurrencies. Therefore, Arthur proposed the idea of creating a token on the blockchain that can be easily transferred like Bitcoin but is anchored to the US dollar. This way, they can easily move their funds in and out of the US dollar, and the functionality is exactly the same as depositing and withdrawing in US dollars, with the advantage of not needing the slow and cumbersome intermediary of the banking system.

Inspired by Arthur’s article, Ethena emerges

Soon, Arthur’s idea of a Bitcoin-based stablecoin caught the interest of others, such as Ethena founder Leptokurtic. In a post, Leptokurtic stated that he created Ethena inspired by Arthur’s article. Leptokurtic said, “I believe in the rationale and importance of this product. The most important tools in the crypto field still rely entirely on traditional banking infrastructure, which is also the most important unresolved issue in the crypto field. Someone always needs to step up and solve it. We are working on creating a parallel financial system. If Ethena succeeds, it could become one of the more important infrastructures across DeFi and CeFi. US bonds have always been one of the globally important financial reserves, but this asset class does not exist in the crypto industry. Although the stablecoin market in the crypto industry is large, the global accessible and permissionless market for USD-denominated reserve assets is even larger. Ethena’s vision is to create a USD stablecoin that does not rely on fiat banking systems.”

A Better Alternative to BTC – stETH

Currently, the project Docs have not been released, and the website only has a simple interface. Next, let’s introduce the project. Previously, Arthur outlined the mechanism design for the new stablecoin in the article:

  • Stability achieved through Delta-neutral hedging with BTC

  • Connected to centralized liquidity venues for scalability

  • Custody of assets on trading platforms

Ethena also agrees with this mechanism but makes two important changes to the implementation:

  • Initially, replace BTC with ETH and stETH

  • Seeking a more decentralized and transparent custody solution

Currently, Ethena’s products are divided into three categories: USDe, Internet Bonds, and Repo Financing.


The first category of products is the stablecoin USDe provided by Ethena for derivative infrastructure. It transforms ETH or its derivatives into a scalable crypto-native yield stablecoin that does not rely on the banking system. USDe is fully collateralized on-chain and maintains stability through Delta-neutral hedging with stETH on CEX and DEX. Additionally, tokens that generate profits, such as stETH, can also serve as hedging assets for USDe, providing an additional layer of stability.

Users can deposit USD, ETH, or stETH as collateral to create USDe. Collateral is allocated to various secure, programmable, and transparent on-chain MPC custody contracts. On-chain collateral storage ensures that it does not rely on centralized service providers for custody, thus reducing counterparty risk. USDe generates profits for users based on stETH yield and perpetual ETH funding rates. Unlike traditional crypto stablecoins, the profits generated through ETH and its derivative yield and futures premiums are entirely accumulated by the users.

Let me explain Delta Neutral. Delta Neutral is a portfolio composed of related financial products, and its value is not affected by minor price fluctuations in the underlying assets. This portfolio typically includes options and corresponding underlying assets, allowing deltas to hedge and offset each other, thereby minimizing the impact of underlying asset price changes on the portfolio and maintaining stability.

Internet Bonds

The second type of product, Internet Bonds, is a globally used floating and fixed-rate USD-denominated bond. It is also based on USDe and is approximately converted into fixed income for bondholders through the underlying yield of stETH and the futures market. This makes it possible for the first global accessible and permissionless crypto reserve tool. Users can create various fixed and floating rate bond exposures using expiring futures or perpetual contracts, thereby forming a cryptocurrency yield curve.

Repo Financing

Ethena also features a repo bond agreement function, allowing users to provide liquidity on the Repo product and earn a certain interest rate. In addition, it allows users to enhance yield and cross DeFi composability on the stETH and USDe collateral markets.

Dragonfly Leads, Supported by Numerous CEX

Recently, Ethena also announced its $6.5 million seed round financing, led by Dragonfly. In addition, it has received support from trading platforms such as Deribit, Bybit, OKX, Gemini, Huobi, and BitMEX founder Arthur Hayes and his family fund. Ethena is also the first derivative stablecoin project in crypto history to receive support from so many CEX simultaneously.


In summary, Ethena has several highlights:

  • Delta Neutral: 100% trustless crypto assets used as collateral;

  • Anti-censorship: Not custodied by the banking system;

  • Embedded yield: Earning from stETH and basis arbitrage;

  • Scalable: No over-collateralization required.

Ethena’s emergence may bring a new revolution to stablecoins. It doesn’t hold auditable US Treasury collateral in bank accounts and has trustless crypto collateral beyond traditional finance. Ethena can not only provide scalable on-chain stablecoins but also transform ETH into globally accessible and permissionless Internet Bonds.

Ethena is a project originated from Arthur Hayes’ idea and led by Dragonfly, which deserves attention. Additionally, from the perspective of yield, Ethena combines ETH staking yield with arbitrage yield, and the funding rate can be very attractive. If a portion of its yield can be shared with USDe holders in the future, it will be well received by the crypto industry.

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