Ethena Labs Secures $14 Million to Develop Ethereum-based Synthetic U.S Dollar
Summary:
Ethena Labs, a startup developing Ethereum-based financial tools, has received $14 million in funding, led by venture capital firm Dragonfly, to support the creation of USDe, a synthetic dollar, which uses hedging techniques and staked Ether as collateral. The startup maintains this offers a new opportunity in the crypto market, which currently relies heavily on centralized stablecoins. Though safeguards are in place with institution-grade firms, liquidity and counterparty risks pose challenges for synthetic dollars.
Ethena Labs, a startup based outside the United States, envisions new opportunities with financial tools linked to the U.S. dollar. By receiving $14 million in funding, Ethena plans to develop an Ethereum-based synthetic dollar. The news of the funding was announced on 16th February, with venture capital firm Dragonfly leading the investment, along with other participants. Ethena's initial financial boost in 2023 came from a $6 million investment from a series of backers, such as Binance Labs, Gemini, Bybit, Mirana Ventures, OKX Ventures and Deribit, all supporting the startup's aim to create decentralized financial frameworks utilizing the Ethereum network.
The funding will be channeled towards the development of USDe, a synthetic dollar supported by delta-hedging techniques with Ether (ETH) as its collateral. Since its December launch, this synthetic dollar has accumulated a total value locked of $200 million, as evidenced by DefiLlama data on the 16th of February 2024.
In an explanation provided to Cointelegraph, Ethena Labs clarified that USDe utilizes "delta-neutral" equilibrium achieved through short-stakedown Ethereum collateral using perpetual swaps to retain its alignment with the U.S. dollar. Therefore, it relies on an amalgamation of hedging strategies to retain a one-to-one ratio with the USD through the use of financial derivatives, such as arbitrage and perpetual swaps contracts. This is a departure from stablecoins' standard methods of maintaining value via either direct collateral or algorithmic strategies.
Highlighting the potential of stablecoins, Ethena Labs CEO Guy Young stated that; stablecoins are an essential tool within the crypto economy, with global demand exceeding $130 billion despite the full internalization of the yield. For illustration, the leading stablecoin provider, Tether Holdings Limited, reported a net profit of $2.85 billion in the last quarter of 2023, largely coming from the yield of its Tether (USDT) reserves, which included around $1 billion in interest from U.S. Treasury securities – the principle asset backing the stablecoin.
Guy Young added that, the crypto market largely depends on centralised stablecoins with collateral stored within the banking system, making developing a synthetic alternative appealing. However, despite the synthetic dollar's delta-hedging, it’s not risk-free. Market stress and unforeseen circumstances could cause liquidity and counterparty risks, which Ethena plans to mitigate by having collateral held and reconciled by reputable firms like Fireblocks, Copper and Bitgo.
Dragonfly partner Tom Schmidt recognized that while stablecoins have massively risen in popularity over recent years, challenges with stability, censorship, and capital efficiency exist. He lauds synthetic products as the “holy grail of crypto dollars.”
Published At
2/16/2024 8:12:34 PM
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