USDe Overview

Ethena Labs manages the issuance and redemption of a delta-neutral synthetic dollar, USDe, fully-backed, onchain, scalable, and censorship-resistant form of money.

The mechanism backing USDe will enable the first "Internet Bond" that will sit alongside the synthetic dollar, offering a crypto-native, yield-bearing, dollar-denominated savings instrument, derived from staked Ethereum returns and the funding and basis spread available in perpetual and futures markets.

Peg Stability Mechanism

USDe derives its peg stability from executing automated and programmatic delta-neutral hedges with respect to the underlying collateral assets.

Hedging the price change risk of the collateral asset in the same size ensures the change in value of the collateral asset is offset by the change in value of the hedging leg.

This ensures the synthetic USD value of the collateral remains relatively stable in all market conditions.

Ethena Labs does not use any material leverage to margin the delta hedging derivatives positions beyond the natural state as a result of exchanges applying slight discounts to the value of staked Ethereum assets as margin collateral on the initial hedge and issuance of USDe.

Key Information

1. Users are able to acquire USDe in permissionless external liquidity pools.

2. Approved parties from permitted jurisdictions who pass KYC/KYB screening are able to mint & redeem USDe on-demand with Ethena Labs contracts directly which will include only market making entities.

3. There is no reliance upon traditional banking infrastructure as trustless collateral is held and stored within the crypto-system. USDe is fully backed by users' deposits at all times.

4. Users are also able to complete Cross Market Arbitrage by minting & redeeming USDe with Ethena and trading USDe in external markets such as Binance or Curve pools to capture price dislocations.

Mechanic Example

1. A user deposits ~$100 of stETH and receives ~100 USDe atomically in return less any execution costs to execute the hedge.

2. Slippage & execution fees are included in the price when minting & redeeming. Ethena earns no profit from minting or redeeming USDe from users accessing the product.

3. Ethena Labs opens a corresponding short perpetual position for the approximate same dollar value on a derivatives exchange.

4. The assets received are transferred to an "Off Exchange Settlement" provider. Backing assets remain onchain and off-exchange servers to minimize counterparty risk.

5. Ethena Labs delegates, but never transfers custody of, backing assets to derivatives exchanges to margin the short perpetual hedging positions.

Generated Yield

Ethena Labs generates two sustainable sources of yield from the deposited assets.

The returned yield to eligible users is derived from:

1. Staking Ethereum to receive consensus and execution layer rewards.

2. The funding and basis spread from the delta hedging derivatives positions.

Yield from Staking Ethereum is floating by nature and denominated in ETH.

The funding and basis spread yield can be floating or fixed depending upon if the protocol uses non-deliverable or deliverable derivatives positions to hedge the collateral's delta.

The funding and basis spread has historically generated a positive yield given the mismatch in demand and supply for leverage in crypto as well as the existence of positive baseline funding. If funding rates are deeply negative for a sustained period of time, such that the staked Ethereum yield cannot cover the funding and basis spread cost, the Ethena insurance fund will bear the cost.

Risks

The protocol is exposed to various risks including but not limited to:

1. Smart Contract Risk

2. External Platform Risk

3. Liquidity Risk

4. Custodial Operational Risk

5. Exchange Counterparty Risk

6. Market Risk

Ethena Labs recognizes these risks and actively attempts to ameliorate & diversify these risks as much as possible. In practice, this means we use multiple providers for each step of the workflow and actively monitor all partners and market conditions.

Every element of the Ethena Labs design has been formulated with risk mitigation in mind including the use of custodians, absence of underlying leverage, and diversification constraints on the hedging positions

Ethena Labs will also be as transparent as possible by providing onchain proof of backing assets in combination with proof of the derivatives positions in our public dashboards on the application.