The Optimist Twitter Space - Synthetic Dollar with Ethena

In The Optimist’s Twitter Spaces which took place on March 29, 2024, Subli hosted Seraphim from Ethena to discuss Ethena, stablecoins, synthetic dollars, and more! Read our notes below to learn more.

Background

Subli (Host) – Founder of The Optimist

Seraphim (Guest) – Head of Growth at Ethena

Ethena – a synthetic dollar protocol built on Ethereum that provides a crypto-native solution for money not reliant on traditional banking system infrastructure

Exploring Ethena: Transitioning from Stablecoins to Synthetic Dollars

Seraphim shares his background in the cryptocurrency space, including his earlier jobs and how he transitioned from traditional finance to crypto through DeFi activities.
Seraphim mentions his previous position at Lido and describes how he became involved with Ethena after a tweet led to a meeting with one of Ethena’s founders, Guy.
Seraphim explains his initial advisory role at Ethena and his decision to fully commit to the project, highlighting the project’s potential and his excitement about its prospects.
Subli gives a brief overview of Ethena, describing its function of issuing stablecoins backed by staked assets and highlighting its rapid growth to become a significant player in the crypto market.
Seraphim says that they recently stopped referring to their financial product as a stablecoin, indicating a strategic shift in branding or functionality.
Seraphim says that the term “stablecoin” might not be appropriate for their product due to its backing by crypto assets rather than traditional dollar assets, suggesting “synthetic dollar” as a more accurate term.
He explains that the synthetic dollar is minted using other cryptocurrencies which are then used to hedge positions in the derivatives market, providing a high yield due to the current bull market’s high funding rates.
Subli asks about the rapid growth in demand for $USDe, noting its quick rise in the stablecoin market rankings and questioning if this is just hype or if there are substantial reasons behind it.
Seraphim jokes that posting pictures of his abs might have contributed to their success but then highlights the attractive yields derived from centralized exchanges as a significant growth factor. He highlights a successful marketing campaign and mentions a particularly successful trade in the Pendle pool that boosted their popularity.
Subli seeks to discuss the three core aspects of stablecoins: decentralization, scalability, and capital efficiency and asks where Ethena fits within these parameters.
Seraphim states he prefers to call it a synthetic dollar instead of a stablecoin and discusses the semi-centralized nature of their setup, using centralized exchanges rather than solely relying on smart contracts. He explains that their system is somewhat decentralized but not to the extent of other projects like Liquidity, which operate fully on smart contracts.
Subli confirms that minting and redeeming $USDe is reserved for KYC-approved parties, highlighting a controlled approach to managing the synthetic dollar’s issuance and redemption processes.

$USDe Eligibility and Scaling Strategies Discussed at Ethena

Subli asks if there is a minimum amount required to meet $USDe eligibility or if it’s available to anyone as long as they complete KYC.
Seraphim explains that in the long term, the market will predominantly consist of market makers, not concerning the size but the capability to enter the market and perform transactions like buying cheaply and redeeming or minting.
He mentions that initially, during the private launch before public access, there was a substantial minimum size due to involvement from large institutions and sophisticated investors, but it will eventually shift primarily to market makers.
Subli expresses excitement and clarifies his understanding that the minting and redemption features were designed for retail investors; however, he realizes it actually targets ‘smart money’ to facilitate another type of stable coin purchase on secondary markets.
Seraphim discusses the limitations posed by the current size of the Bitcoin and Ethereum futures markets and the dependency on the growth of these markets to potentially expand to a target like a hundred billion.
Subli shares his observations from the Ethena website, noting its simplicity and listing multiple exchanges where short positions are held. He inquires about the potential for Ethena to integrate with traditional financial future markets in the US.
Seraphim clarifies which future market Subli is referring to, confirming if it’s CME futures. He acknowledges the possibility of integrating with such markets but highlights several complications, including dealing with custody providers and needing agreements with CME futures.
Seraphim explains the differences between funding rates in centralized exchanges and traditional finance futures like CME, noting that funding rates tend to be lower and more stable in traditional finance due to their structure.

Understanding $USDe: Capital Efficiency, Yield Distribution, and Stability

Seraphim explains that $USDe operates on a one-to-one collateral basis, which he claims is more capital efficient because the amount of $USDe minted is equal to the dollar value of the collateral deposited.
Subli asks about the sources of yield for $USDe, noting high annual yields evident on their website, and questions where these yields are allocated.
Seraphim describes the distribution process of yields, highlighting that stakers see their $sUSDe (staked USDe) value increase, which is a reflection of an increased $sUSDe exchange rate rather than a rebase.
Subli clarifies if staking $USDe is necessary to receive yields from $sUSDe, and Seraphim confirms this, discussing the redistribution of staking yields and funding rates to $USDe stakers.
Seraphim admits that not all yields are distributed to $sUSDe holders; instead, they flow into Ethena’s reserve fund, which is used as a financial buffer for the protocol, especially useful when funding rates are negative.
Subli discusses the volatility of funding rates during market fluctuations and proposes a question about the potential for fixed yields, suggesting the use of the reserve fund to stabilize returns during lower yield periods.
Seraphim says that their current philosophy is market-driven, favoring natural rate adjustments over fixed yields, and indicates that they might close trades to mitigate negative impacts if necessary, relying on the reserve fund as a backstop.
Seraphim explains that funding rates do go negative during volatile events, but overall, they tend to remain positive because there’s always demand for leverage. He mentions past research showing minimal periods of negative funding.
Subli shares data from his personal account about funding rates for Ethereum since 2020, noting that negative rates were rare, indicating a strong product-market fit for their stablecoin.
Seraphim offers additional data on Ethereum funding rates across different years to emphasize stability, even during events like the Terra Luna crash and the Ethereum merge.

Stability Mechanisms of $USDe and Integration Plans with Mode Network

Subli questions the mechanisms that ensure the synthetic dollar $USDe maintains its $1 peg in the secondary market.
Seraphim details the redemption and minting mechanisms used to stabilize $USDe, similar to those used by $USDT and $USDC, which involve market maker strategies to maintain the peg.
Seraphim discusses Ethena’s collaboration with Mode, including plans to bridge $USDe and $sUSDe tokens to the Mode network, expressing optimism about future activities within the broader Optimism ecosystem.
Subli mentions that Mode’s involvement will differ when considering different blockchain modes like Optimism and Base, with a focus on how bridged assets generate yield for Mode’s treasury.
Seraphim confirms there’s a native yield component for Mode, where deposits are routed through Ethena in the backend.
Subli clarifies that Mode will automatically swap non-stablecoin assets, like $ETH, into stablecoins to avoid losing upside potential.
Seraphim suggests that Mode might introduce new financial products like $USDe or $sUSDe, tied to different campaigns announced on April 2nd, 2024.
Seraphim shares that Mode might be integrated into multiple chains soon, citing ongoing negotiations with several chains, including Mantle.
Subli discusses the upcoming deployment of $USDe and $sUSDe on Layer-2 platforms, highlighting ongoing campaigns for farming Shard points.
Seraphim hints at major upcoming announcements involving collaborations with partners like Mantle, Arbitrum, and Solana, highlighting a focus on integrating Bitcoin as collateral.
Seraphim notes that liquidity for staking contracts, currently available on the mainnet, is expected to expand to other major chains by the end of May, 2024.

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Show Information

Medium: Twitter (Audio)
Show: The Optimist Twitter Space
Show Title: Synthetic Dollar with Ethena
Show Date: March 29, 2024