Unlocking High APYs with USDe: A Deep Dive into the Ethena Stablecoin Strategy
Recently, I stumbled upon a fascinating stablecoin strategy: by using USDe as collateral, one can leverage to borrow DAI, achieving an Annual Percentage Yield (APY) exceeding 300%!
Such an impressive return piqued my interest in USDe, though it also raised some questions: What exactly is USDe, and could it possibly be part of another algorithmic stablecoin bubble? The Ethena stablecoin initiative represents a pioneering effort to mint stablecoins. This project, supported by third-party fund custody and employing a delta strategy (offsetting risks using LST collateral interest rates and short position funding rates), marks a significant innovation in the field. Initially put forward and funded by Arthur Hayes, Ethena is a quintessentially Western project with reputable backing (OG). According to Hayes, Ethena addresses two critical flaws of USDT: it allows users to benefit from minting taxes and provides a safeguard against the risks inherent in the US banking system. USDe has demonstrated exceptional utilization across a variety of protocols.
As EigenLayer’s token release draws near, bringing LST and re-staking narratives back into focus, Ethena’s USDe has emerged as a leader in stablecoin staking. Its prominence is especially notable in the Pendle protocol, where its usage has soared to $251.41 million. Furthermore, on the EVM Layer2 platform Zircuit, it has become the most heavily staked stablecoin. Despite the allure of high APYs offered by USDe, a deeper examination of stablecoins’ fundamental purpose and utility suggests that it may not fully live up to its potential as a financial instrument.
Essentially, a stablecoin should act as a value peg to the US dollar, facilitating deposits and withdrawals, and serving as a medium for transactions. However, if the market for ETH Derivatives (as indicated by the latest ETH Derivatives Data Analysis, with a Volume of $32.08 billion and Open Interest of $13.83 billion) is insufficient to sustain a stablecoin’s value, then a narrative focused solely on high APY appears somewhat lacking. Even with an additional $10 billion in BTC derivatives, the market’s dominance by short positions, a lack of sufficient long positions to offset funding rates, and limited profit margins raise concerns.
Yet, the Ethena project has delivered some pleasant surprises, notably through its shard campaign, which uses shards instead of points to incentivize users, thereby supporting the ecosystem’s long-term viability. By depositing USDT, USDC, DAI, or crvUSD on the Ethena Labs official website for USDe, users engaging in liquidity provision, locking, or staking activities can earn shards. The second stage, involving the purchase of YT on Pendle, has been met with overwhelming enthusiasm. Ethena has announced that the shard campaign will conclude once the USDe supply surpasses 1 billion — a milestone already achieved, though the campaign continues.
Within just three months, USDe’s total supply exceeded one billion, revealing its ambitious goal to usurp the MakerDAO DAI stablecoin market. Maker’s adoption of USDe as a yield source for collateral can be seen as a strategic defensive measure. The data presented in this article was gathered through research, with special thanks to @Luffy for his insightful guidance.
