Summary

This post is intended to outline the roadmap and unified vision for Ethena in the coming months.

i) Why we believe Ethena is important
ii) What we are excited by: USDe convergence of DeFi, CeFi, TradFi
iii) The Ethena Endgame: Money, Network, Exchange

Why is Ethena Important?

The holy grail of crypto has always been, and will always be, attaining the status of money.

Bitcoin was originally envisaged as peer-to-peer electronic money and through time evolved into a more narrow and simplified value proposition: a digital store of wealth.

Next, Ethereum brought the vision of a platform for programmable smart contracts and decentralized applications to life. Through time, and various iterations on Ethereum’s monetary policy, the value proposition of ETH the asset again converged to its use as money.

And as we continue to create more layers of infrastructure, the vast majority of which are complete vapourware which can never justify their valuation on any metric of fee generation, once again, valuations are tied to the probability that these tokens can become money in their own local economies of empty vacuous blockspace.

Despite their individual value propositions, and the narratives we collectively formulate around each asset, the reality is that while Bitcoin, Ethereum and your favourite infrastructure layer exhibit some narrow characteristics of money, the lifeblood of transactions within crypto capital markets are conducted with digital dollars.

Every piece of data related to transaction volumes both onchain and on centralized exchange venues confirm the reality: stablecoins and dollar-pegged assets are digital money, and everything else is competing for a weaker status of digital stores of wealth.

Rather than view the world through our own biases as we wish it would exist, perhaps it is better to view the world as it actually does exist.

It may be the ultimate irony that the most important practical application of crypto, a system which intends to undermine existing monetary power structures, is the storage, movement and transfer of value in digital dollars.

Whether you like it or not, and whether it fits your idealized vision of crypto or not, digital dollars are actually being used as money.

And yet, we have not found a suitable native version of our own money untethered, and independent of, the legacy system.

So why is Ethena important?

If you believe:

-The use case of money is the holy grail
-The addressable market of money is the largest in crypto
-The killer application of crypto is our own native form of money

Then it stands to reason that creating our own form of money is one of, if not the most, important mission to work towards.

Perhaps you don’t agree - and that’s ok.

It is likely that we won’t succeed - and that’s also ok.

But we do believe this is important, and that is why we are here.

What Are We Excited By? The Convergence of DeFi, CeFi and TradFi

In 2014, Tether changed the history of CeFi forever.

In 2017, MakerDAO changed the complexion of DeFi forever.

In 2024, we believe Ethena will reshape and force the convergence of:
1. DeFi
2. CeFi
3. TradFi

With USDe being the connective tissue which ties it all together.

1. DeFi: Internet Bond Collateral

The first time I met Kain from Synthetix it was just after Ethena had closed its seed raise. Unfortunately Kain had missed the pitch in his inbox. He sat down and outlined out all the ways he wanted to help me; ideas around where the product could go, how it could fit into the rest of DeFi, all of the other builders I should speak with to iterate on the idea, and what it might mean to bring a new dollar primitive onchain at scale.

At the end of the breakfast I asked him why he wanted to help with zero economics exposure to Ethena. He responded: “I think this could be one of the most important new developments in DeFi, and I just want to see DeFi win”.

How does DeFi win?

Dollars are the lifeblood of every major primitive in DeFi, and the production of dollars is the best business model in crypto. This is why you have seen almost every major DeFi application expand into the vertical of dollar issuance.

If we examine each core primitive in DeFi and where Ethena is embedded:

sUSDe as collateral in money markets

Before Ethena came to market the only meaningful use case for money markets was directional leverage on WBTC or ETH, or levering the staking yield on stETH. Introducing a new scalable dollar denominated asset with structurally higher market yields, that are also fully exogenous to DeFi, unlocked a new use case for money markets to provide cheap dollar borrow leverage on the cash and carry trade in CeFi. Borrowing from DeFi to provide capital into CeFi perpetuals markets is a multi-billion dollar opportunity which will force the convergence of interest rates between these two markets. We have already seen every major money market in DeFi move quickly to recognize this including Aave, Curve, Maker via Spark, Ajna and Morpho, where USDe has been the fastest growing dollar collateral asset on these platforms.

sUSDe as margin collateral in perpetual DEXs

Ethena related hedges alone account for more than 2x the amount of total open interest on every perpetuals DEX combined. Flows related to USDe hedging would easily double the size of any DEX market where the Ethena protocol chose to deploy. More interestingly, every DEX uses dollars as collateral. Integrating USDe as margin collateral with an embedded yield via sUSDe unlocks a significant improvement in capital efficiency and returns where the basis from CEX venues can be used to offset funding costs while trading on DEXs. Ethena can provide valuable one-directional non-toxic flows to these platforms, while embedding USDe as the collateral asset. Deeper liquidity, higher open interest, and reduced funding costs would all contribute to kickstarting a healthy growth flywheel and expand the addressable market of perpetual DEXs by an order of magnitude.

sUSDe as back-end infrastructure for stablecoin issuers

Since the launch of Ethena USDe has been the fastest growing USD denominated asset in crypto history. Producing a structurally higher economic return on dollars is one of the most powerful moats of any product in crypto. Stablecoin issuers have 3 viable sources of potential yield at billions of dollars in scale for their collateral backing:

i) RWA yield
ii) Overcollateralized lending on BTC and ETH
iii) Perpetual funding and the basis in futures

Rather than providing a competing product to issuers such as MakerDAO and Frax, Ethena sits as neutral infrastructure behind these protocols whereby they can choose the composition of their own backing sits with USDe. This provides these protocols a previously inaccessible source of return at enormous scale - with both protocols having announced up to $1.25b of allocation into USDe. As other stablecoin issuers grow and proliferate through DeFi, Ethena will expand alongside them.

sUSDe as base asset for interest rate swaps

The growth of Pendle this year has unlocked a new primitive within DeFi for interest rate swap products. While to date the majority of this volume has been focused on speculation around points for pre-token projects, once Ethena was onboarded this unlocked the first scalable yield-bearing dollar instrument on which to build a yield-curve. Interest rate swap products are in the very early stages of their development, but sUSDe provides the base asset to unlock fixed to floating rate swaps on the largest real yield in crypto: staked ETH and the basis in centralized futures markets. The basis in futures markets are the largest real yield in crypto. As a result, USDe will be the core primitive on which these interest rate markets are built.

USDe as money in spot AMM DEXs

On any given day, 3 out of 4 of the highest volume assets traded onchain are USD denominated. Again, digital dollars are objectively the most important assets for exchange in spot markets both onchain and externally. As USDe grows to be one of the most liquid assets onchain, it will continue to proliferate as money within trading pairs for spot assets on DEXs.

In short, every important DeFi primitive is powered by dollars. We believe USDe is the ideal construction of a crypto-native dollar which can provide a base layer asset for other financial applications to build upon. In its short history of existence, USDe has already become one of the most widely integrated assets in DeFi.

2. Tether’s Exorbitant Privilege: Money in CeFi

Tether is not just one of the greatest businesses in crypto. It is one of the best businesses of all time, in any context, ever.

What is their most powerful moat?

USDT is actually used as money on centralized exchange venues. The most liquid BTC and ETH pair on the largest exchanges is USDT. Importantly, the most traded instrument in crypto, the perpetual swap, is primarily margined and settled in USDT.

Centralized exchanges are also the only viable distribution channel at scale. I don’t believe we have more than 1,000,000 real users actively participating onchain, while the largest exchanges hold the keys to 100,000,000+ users.

Every major success story for a stablecoin has been inexorably linked with distribution via exchanges. But these relationships have often been stressed by political and competitive economic dynamics between issuers and distributors.

While Ethena and USDe started initially onchain in DeFi, the bigger opportunity is providing neutral dollar infrastructure across every major centralized exchange to be used as money.

As Arthur outlined in his original article, it was important that Ethena was not owned or built by a single centralized exchange. Ethena needed to be broadly owned as neutral infrastructure across the space, and in doing so, could help power all of these venues with USDe rather than service only one alone.

Embedding USDe as money in spot trading pairs, integrations with Ethena unlocking yield-bearing collateral for $20b+ of perpetuals currently margined in dollars, and within dollar based “earn” products represent one of the largest growth opportunities.

Why would these centralized venues want to do so?

Because for once they are aligned and incentivised to do so.

3. The Final Boss: Dollar Yield in TradFi

Fixed income markets are the largest liquid investment class in the world at over $130 trillion in size. The majority of sovereign wealth, pension fund and insurance pools of capital sit within fixed income products. The most important financial instrument on earth to save and preserve wealth is simply a dollar with a yield. It sounds simple, but the demand for this product is several orders of magnitude larger than the entire crypto market.

What is unique about the yield produced by Ethena is:

i) it combines two of the only forms of crypto native real yield at billion dollar scale
ii) the yield has exhibited weak negative correlation to rates in legacy finance
iii) the underlying backing is sitting in custodians which TradFi can underwrite

Packaging the two sources of scalable crypto-native yield into a dollar-like product gives simple access to these allocators to access and harvest the excess returns of crypto in a single asset. When viewed in the context of their existing fixed income portfolios, an unlevered dollar producing >20% on USD in the last year is unheard of.

What is most interesting is when real rates eventually fall, speculation in crypto increases alongside a long sided demand for leverage, which will increase the yield produced by Ethena. As the benchmark rate of RWAs decline, Ethena becomes even more interesting from a risk-adjusted basis to offset reduced real rates on legacy fixed income products.

This characteristic is one of the most important reasons trillion dollar TradFi entities have invested into the Ethena ecosystem.

RWAs will never be a category that brings meaningful new capital into crypto.

Why would TradFi ever put a dollar into a tokenized t-bill onchain with security guarantees facing a shell entity in the Caymans, with added fees, operational risk, smart contract risk and regulatory risk, rather than accessing it themselves directly?

However, a superior risk adjusted dollar yield produced by crypto native sources is the type of product which brings billions of dollars of flows out of the old system, and into the internet system.

While the core product is a synthetic dollar, Ethena can also be viewed through the lens of an interest rate arbitrage vehicle which forces the convergence between disparate rates across DeFi, CeFi and TradFi, with USDe simply being the balancing item that ties it all together.

Beyond USDe: The Ethena Endgame

What does it take to create a $100b business or protocol in crypto?

To start, you need to be the dominant leader, and you have 3 choices of category:

i) Money: BTC and ETH
ii) Network: ETH and SOL (2021 valuation)
iii) Exchange: Binance and Coinbase (2021 valuation)

The endgame of Ethena sits across all three of these categories.

i) Money: USDe

The summary section above has outlined why we think USDe is the best chance we have to create our own form of money. This has always been, and will always be, the ultimate guiding vision of Ethena.

Development is now underway for two additional initiatives which will build upon and support the growth of USDe as money.

ii) Network: Unified Money Layer

Once you have created money, you now have the most powerful product in crypto, as well as the killer app.

The natural extension of this core product is to build an economy and network upon it.

Most base layer infrastructure starts as a platform, and then attempts to bring applications with their users.

We believe this is sub-optimal sequencing.

Why?

Ethena starts with the killer product of money. This core product provides the lifeblood asset for other financial applications to build upon, many of which have already integrated with and benefit from the existence of USDe.

With USDe as the fulcrum asset, these applications can then integrate and compose within a base layer which is optimized for the use cases of money and finance.As we have outlined, we view a native yield bearing dollar as the single most important asset for other financial applications to build upon.

As for users, a digital dollar is also the only product every single participant within crypto uses every single day, and the only offering crypto has provided to the rest of the world with unquestionable product market fit.

In less than 3 months Ethena alone has captured sufficient USD-denominated TVL that it would rank 6th of any existing chain, many of which have existed for several years.

How do we get one billion users onchain?

Well, the target addressable market for a programmable dollar is the entire world.

And when you make this dollar more useful, more composable and with the best risk-adjusted return, the world will eventually come to realize this too.

Ethena starts with the killer product of money, and will then build a new internet economy and financial system upon it.

iii) Exchange: Aggregated Liquidity Layer

Ethena holds a unique position within the crypto capital markets.

While USDe has already had a meaningful impact on DeFi across major applications, we are yet to see the second-order implications of the liquidity sitting within Ethena and what it can potentially unlock for both existing and new exchange venues.

It is not widely understood how Ethena will eventually transform to sit alongside other CEXs and DEXs as one of the deepest pools of liquidity itself.

Specifically, the existing backing behind USDe and related hedging flows can enable:

i) A liquidity aggregation layer to sit adjacent to our existing centralized and decentralized exchange partners in order to support deeper liquidity on their venues

ii) Bootstrap new incubated decentralized exchanges on the Ethena network

Much like USDe is positioned as neutral infrastructure across DeFi and CeFi platforms, the backing behind USDe can also be conceptualized as a large pool of resting inventory for both spot collateral and perpetuals which can be used to support other exchange venues via an aggregated exchange liquidity layer.

At any moment Ethena knows exactly where it wants to buy or sell spot, and where it wants to buy or sell perpetuals. This can be aggregated across all major trading venues where the Ethena balance sheet would provide one of the deepest order books and OTC pools in the entire space across both spot and derivatives, with Ethena itself as the single largest counterparty to external takers.

Having the ability to support with flows to bootstrap new decentralized exchanges on the Ethena network would also instantly enable Ethena to address the cold-start problem for new decentralized exchanges building up the base layer network.

The liquidity cold start problem is the most challenging hurdle for decentralized exchanges to begin to meaningfully compete.

Liquidity is one of the very few differentiating qualities for any exchange, and it is the only real moat that currently exists for incumbents. In less than 3 months Ethena is now the single largest counterparty exposure to centralized exchange venues, and 2x larger than the entire DEX space combined.

Ethena related flows are already the most significant of any entity in the space, and at that scale would be the determining factor behind which venues grow, and which venues die.

Ethena is uniquely positioned to provide a solution to support the growth of new venues on its own network.

Just as USDe benefits from being neutral infrastructure across venues in both DeFi and CeFi, instead of competing directly, the Ethena exchange layer would sit in a similar position as USDe by:

i) supporting existing partner venues with an aggregation layer between them, and
ii) enabling the growth of new venues on the Ethena network

The larger USDe grows, the lower the cost of capital for dollars falls across crypto.

The larger Ethena grows, the deeper and more liquid all venues become.

This is how we win together.

Money. Network. Exchange.