Ethena: The best choice for synthetic dollars in the on-chain encryption ecosystem.

As a sign that winter is coming to an end, the hard shell snow in Hokkaido begins to melt. The days are sunny, but the nights are bone-chilling cold, creating what is known as "hard shell snow." Beneath the seemingly perfect surface of the snowy ground lies a layer of hard ice and fragile snow.

A year ago, I published an article titled "Hard Shell Snow" in which I proposed how to create a synthetic fiat stablecoin that does not rely on traditional banking systems. My idea was to hedge the positions of perpetual futures contracts for long and short in cryptocurrencies to create a synthetic unit of fiat currency. I named it "CNYUSD" because I envisioned using perpetual short futures contracts for Bitcoin and XBTUSD as a way to create synthetic dollars.

A year later, Guy founded Ethena. He had previously worked at a large hedge fund and discovered the potential of cryptocurrency during DeFi Summer. Inspired by my article, he decided to launch his own synthetic dollar stablecoin, but chose to use ETH instead of BTC.

The reason Guy chooses ETH is that the Ethereum network offers native yields. Ethereum validators pay a small amount of ETH for each block. In addition, ETH is now a deflationary currency, and ETH/USD forwards, futures, and perpetual swaps continue to trade at a premium compared to spot. By combining physical staking of ETH with a short position in ETH/USD perpetual swaps, a high-yield synthetic dollar can be created. Currently, the annual yield of spot ETH USD (sUSDe) is approximately >50%.

Guy named his synthetic dollar "Ethena" and assembled a strong team. In May 2023, I became a founding advisor and received governance tokens. After the official launch of the Ethena stablecoin USDe, the issuance approached 1 billion coins within 3 weeks.

I believe that Ethena will eventually surpass Tether to become the largest stablecoin. This will take many years, but I want to explain why Tether is the best and worst business in cryptocurrency.

Tether is the best business because it may be the most profitable financial intermediary for each employee. But it is also the worst business because Tether's existence depends on the support of the banking system, which can shut it down at any time.

Tether is facing two major issues:

1. Users cannot share the net interest margin income of Tether.

2. Even if Tether operates in compliance, the U.S. banking system could shut it down overnight.

In contrast, Ethena is fully supported by the encryption ecosystem. USDe holders can directly stake USDe to earn most of the net interest margin. Major exchanges have invested in Ethena's early financing.

The operation of Ethena is as follows:

• Ethena is a synthetically created fiat encryption dollar.
• ETH or stETH and other staked ETH derivatives as collateral.
• Ethena sells equivalent ETH/USD perpetual swap contracts to lock in dollar value.
• Then mint the corresponding amount of USDe.

The yield of USDe comes from ETH staking rewards and the positive funding fee of ETH/USD perpetual swaps. This is completely different from UST, whose yield comes from selling Luna.

The main risks faced by Ethena include:

• Exchange counterparty risk
• LSD smart contract risks
• Negative funding fee risk
• Ethena Smart Contract Risks
• The limit on the scale of open contracts has increased.

To mitigate these risks, Ethena has established an insurance fund.

Overall, Ethena represents the best attempt for the encryption ecosystem to autonomously create synthetic US dollars. It is supported by the encryption ecosystem and serves the encryption ecosystem. As people gradually trust the high yield of USDe, its circulation is expected to grow significantly.

Ethena is our own, serving ourselves. Tether is ours, but serves others.

Whether you are going long or short on USDe or the Ethena governance token, it is essential to understand Ethena's mission and its importance to the success of encryption.