Research Summary
The report discusses the concept of a synthetically backed fiat stablecoin, independent of traditional finance systems, proposed by Arthur Hayes. It explores the creation of Ethena’s USDe stablecoin, which improves upon Hayes’ idea by using Ether instead of Bitcoin. The report also critiques Tether’s vulnerability due to its reliance on traditional banking partnerships and potential regulatory pressures. It further delves into the structure, risk factors, and potential of Ethena’s USDe.
Key Takeaways
The Concept of a Synthetically Backed Fiat Stablecoin
- Arthur Hayes’ Proposal: Hayes proposed a synthetically backed fiat stablecoin, independent of traditional finance systems, using crypto assets and short perp swap positions to create a synthetic USD. He named this concept the Nakadollar.
- Creation of Ethena’s USDe: Inspired by Hayes’ idea, an entrepreneur named Guy founded Ethena, which uses Ether instead of Bitcoin to create a synthetic dollar named USDe. This stablecoin leverages the Ethereum network’s staking yield and the premium from ETH/USD forwards, futures, and perp swaps.
Critique of Tether
- Vulnerability of Tether: Despite acknowledging Tether’s profitability and operational success, Hayes highlights its vulnerability due to its reliance on traditional banking partnerships and potential regulatory pressures from US financial institutions.
- Potential of Ethena’s USDe: Hayes believes Ethena has the potential to surpass Tether as the largest stablecoin, though he acknowledges it may take many years.
Structure and Risk Factors of Ethena’s USDe
- Structure of USDe: USDe is synthetically backed by crypto dollars and pegged 1:1 with the USD. Various authorized participants are allowed to mint and burn USDe.
- Risk Factors: Ethena faces exchange counterparty risk with centralized exchanges (CEXs) and crypto custodians. It is also exposed to smart contract risk and slashing risk, a penalty for Ethereum validators that could reduce the capital held by a validator.
Potential of Ethena’s USDe
- High Yield: Staked USDe (sUSDe) offers a yield of approximately 30%, outperforming other stablecoins like staked DAI and traditional financial instruments such as US Treasury bills.
- Growth Potential: The growth potential for USDe’s circulating supply is capped by the total open interest of ETH futures and perpetual swap contracts on exchanges, which is currently around $8.5 billion.
Actionable Insights
- Understanding the Concept of Synthetically Backed Fiat Stablecoin: Investors and financial institutions should familiarize themselves with the concept of a synthetically backed fiat stablecoin, as proposed by Arthur Hayes, to understand its potential impact on the crypto and traditional finance ecosystems.
- Monitoring the Performance of Ethena’s USDe: Observing the performance of Ethena’s USDe stablecoin could provide insights into the viability and potential of synthetically backed fiat stablecoins.
- Assessing the Vulnerability of Tether: Given Hayes’ critique of Tether, it would be prudent for investors and financial institutions to assess the vulnerability of Tether due to its reliance on traditional banking partnerships and potential regulatory pressures.
