Ethena Labs Enhances USDe with Bitcoin Collateral: Details

Ethena Labs, the innovative team behind the synthetic dollar-pegged product USDe, has introduced Bitcoin (BTC) as collateral to its platform, with ambitions to substantially expand its current $2 billion supply.

In an announcement on April 4, Ethena outlined its strategic move, citing the surge in Bitcoin open interest from $10 billion to $25 million over the past year on major cryptocurrency exchanges. This growth trajectory positions USDe for a potential scaling factor of 2.5, according to Ethena.

Ethena Labs’ New Decision

USDe was initially launched on the Ethereum network on February 19, promising an enticing 27.6% annual percentage yield (APY) on staked USDe. However, concerns arose within the community due to the high APY, which peaked at 113% on March 5 before stabilizing at 7.15%.

Ethena emphasized that incorporating Bitcoin as collateral would enhance liquidity and bolster the security of the USDe product, providing token holders with a safer and more robust investment option. 

“BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity for delta hedging,” said Ethena.

Bitcoin’s Growing Derivative Markets

The decision stems from Bitcoin’s growing derivative markets, offering superior scalability and liquidity for delta hedging, a strategy adopted by Ethena to maintain USDe’s peg.

Previously, USDe was backed by Ether (ETH), Tether (USDT), and Ether-based liquid staking tokens in proportions of 45%, 38%, and 17%, respectively. The majority of collateral was sourced from leading exchanges such as Binance, ByBit, and OKX, with smaller contributions from Deribit, Bitget, and BitMEX.

Ethena Justifies its Inclusion

Despite Bitcoin’s lack of native staking yields, Ethena justified its inclusion by highlighting the diminished significance of staking yields during bull markets, where funding rates can surpass 30%.

Reducing Reliance on Conventional Banking System

Ethena’s approach aims to differentiate USDe from traditional stablecoins by reducing reliance on the conventional banking system, aligning with the ethos of decentralized finance (DeFi).

“BTC also provides a better liquidity and duration profile vs liquid staking tokens. As Ethene scales closer towards $10bn this provides a more robust backing, and ultimately a safer product for users,” said Ethena.

Currently, USDe ranks fifth in market capitalization among United States dollar-denominated products, according to CoinGecko, trailing behind USDT, USD Coin (USDC), Dai (DAI), and First Digital USD (FDUSD).

With the incorporation of Bitcoin as collateral, Ethena anticipates further growth and scalability for USDe, positioning it as a prominent player within the synthetic dollar market and reinforcing its commitment to innovation in the DeFi space.