In an innovative move to bolster the robustness of its synthetic dollar-pegged product, USDe, Ethena Labs has introduced Bitcoin as a new form of collateral.
This strategic addition aims to significantly scale USDe’s supply, which currently stands at $2 billion, leveraging the increasing open interest in Bitcoin across major cryptocurrency exchanges.
Scaling Potential with Bitcoin
Bitcoin’s open interest has witnessed a remarkable rise from $10 billion to $25 million over the past year, indicating a robust market ready for expansion.
By incorporating Bitcoin into USDe’s collateral mix, Ethena anticipates a potential scaling factor of 2.5, according to a recent announcement on X.
After the unprecedented growth or USDe since launch, Ethena hedges represent ~20% of ETH open interest as of today
With $25bn of BTC open interest readily available for Ethena to delta hedge, the capacity for USDe to scale has increased >2.5x pic.twitter.com/glyvBQFEwj
— Ethena Labs (@ethena_labs) April 4, 2024
The decision to include Bitcoin as collateral is driven by a desire to provide USDe token holders with a safer and more robust financial product.
Ethena highlights Bitcoin’s superior liquidity and scalability advantages, particularly in delta hedging strategies, which are crucial for maintaining USDe’s dollar peg.
Delta Hedging Strategy
Ethena’s delta hedging approach involves taking positions in derivatives to counterbalance any volatility in USDe’s collateral value. This method has proven effective in managing the synthetic dollar’s stability, especially during market downturns.
Previously, USDe’s backing comprised ETH, Tether, and Ether-based liquid staking tokens, with Ethena sourcing collateral predominantly from major exchanges like Binance, Bybit, and OKX.
In just 1 year, BTC open interest on major exchanges (exc. CME) has grown from $10bn to $25bn, while ETH OI has grown from $5 to $10bn
BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity for delta hedging pic.twitter.com/ToFowC6Tfw
— Ethena Labs (@ethena_labs) April 4, 2024
Bitcoin’s Role in USDe’s Collateral Mix
While Bitcoin does not offer native staking yields comparable to those of staked Ether, Ethena considers the lower staking yields during bull markets to be less significant.
The focus is on leveraging Bitcoin’s market dynamics to ensure USDe’s stability and scalability.
USDe’s Position in the Market
USDe distinguishes itself from traditional stablecoins by minimizing reliance on the banking system.
With a market capitalization of $2 billion, USDe ranks as the fifth-largest US dollar-denominated digital asset, trailing behind giants like USDT, USD Coin, Dai, and First Digital USD (FDUSD).
Ethena Labs’ incorporation of Bitcoin into USDe’s collateral framework marks a significant step towards creating a more stable and scalable synthetic dollar product.
By leveraging Bitcoin’s liquidity and market presence, Ethena aims to offer USDe token holders a safer and more robust option in the digital asset space.
