Ethena & Synthetix

// Ethena Labs: Enabling the Internet Bond_

Ethena Labs is a decentralized stablecoin protocol built on Ethereum that will provide a crypto-native solution for money, not reliant on traditional banking system infrastructure, alongside a globally accessible and permissionless dollar denominated savings instrument - the 'Internet Bond'.


Ethena Labs is excited to announce we will be building our first decentralized perpetuals exchange integration on the Synthetix platform.

Whilst the majority of open interest and volumes still live on centralized exchange venues (>25x open interest vs onchain exchanges) the Synthetix platform offers a unique platform on which to build part of the collateralization for our core product: USDe.

Our infrastructure is agnostic to whether the liquidity source lives on centralized exchanges or onchain. As long as there is sufficient liquidity to fill our orders with efficient execution and funding rates are both competitive and stable, we will provide short-sided liquidity.

Improvements brought about through the Synthetix v3 on both the funding mechanics and order execution are exactly why Ethena is so excited about building on the Synthetix liquidity layer.

{Synthetix Developments}:

Where Synthetix v2 can be viewed as a single product, v3 can be thought of as a generalized platform where a wide range of financial instruments and DeFi protocols can be built, leveraging any of the collateral pools enabled by Synthetix.

Onchain delta-neutral stablecoins are a clear use case with proven product market fit uniquely enabled by the Synthetix platform.

The introduction of v3 will significantly improve the flexibility in deployment of liquidity to new markets, as well as allowing various forms of non-standard collateral to be introduced as pools or margin collateral.

Ethena aims to integrate with Synthetix as:
i) a liquidity provider on the perpetuals platform,
ii) provide USDe as a margin instrument for trading with an embedded yield, and
iii) to provide USDe as an approved collateral for select pools.

You can learn more about the Synthetix v3 architecture on the Synthetix Blog //

{Why Synthetix}:

Ethena and Synthetix are aligned in many aspects, in particular the Synthetix platform will offer:

1/ Deep onchain liquidity: 

Synthetix’s pricing model, which references Binance book depth as an oracle, enables Ethena to deploy more derivatives flow onchain in a cost-efficient, transparent and trust-minimized environment. In an ideal world, Ethena would be able to hedge all of its collateral onchain, but the liquidity on offer on centralized venues at present is an order of magnitude higher than DeFi. While we will take a pragmatic approach to delta-hedging initially, we hope to grow our share of volume on DeFi as the onchain derivative market matures.

2/ Access to ETH L1 Liquidity

Ethereum L1 will be the first deployment for Ethena, largely driven by the presence of stablecoin and stETH liquidity that is still present on L1 in Curve pools and other AMMs. Likewise, for large market making counterparties to execute funding arbitrage and provide liquidity on decentralized exchanges, withdrawal delays and connectivity issues to centralized exchanges present on L2s are an impediment.

3/ Consistent funding

It’s important we understand the mechanism behind the Synthetix funding rate calculation and how that might affect USDe and Ethena users more broadly.

Synthetix's dynamic funding rate, factoring in both position skew and velocity, maintains skew neutrality, making it an excellent hedging solution for Ethena. The funding mechanism incentivizes traders to take positions that counter demand imbalances in perpetual futures, promoting market balance. A more detailed explanation can be found here, but the short explanation is that this velocity portion of the calculation will help encourage markets to counter any imbalances more than just skew alone would.

We can see this play out in the data, Synthetix funding is often higher or lower than dYdX, who calculate funding a more traditional way and without a velocity adjustment.

2023 has seen broadly positive funding across perp markets, resulting in the velocity factor being additive to the Synthetix rate. The mean funding rate for Synthetix since March this year has been 18.6% annualized, compared to 11.3% on dYdX and 7.2% across centralized perpetuals weighted by open interest.

In positive funding environments, Synthetix perps should provide a more attractive hedging opportunity for Ethena.

4/ Ability to use stETH collateral

The ability to use stETH as collateral for onchain perpetuals on Synthetix allows Ethena to streamline the hedging process and attain a higher overall return on USDe when compared to USD-M perpetual platforms such as dYdX. Perps v3 will offer multi-collateral support and native cross-margin functionality which will help provide more flexibility for both users and Ethena, using the stETH in our collateral base as margin for futures positions with no leverage. 

5/ Provide transparent onchain custody for our users

Synthetix's decentralized, on-chain perpetual futures exchange offers a trust-minimized solution that aligns with Ethena's transparency goals for user assets and collateral solvency.

{What Ethena provides Synthetix}:

Cold start problem of any exchange - how to bootstrap liquidity?

Ethena’s ambition is to provide a stablecoin which scales into the billions - the result of that outcome would be hundreds of million in volume to Synthetix as one of the first markets to leverage perpetuals on ETH Layer 1. The nature of flow that originates from Ethena is ideal for any exchange: predictable, non-toxic and one-directional flow to the short side. The result would be increased liquidity on the platform as which could drive a flywheel of more long side liquidity from traders or market makers to take the opposite position of our predictable flow, and ultimately drive fees to Synthetix stakers. 

Provide more attractive funding profile for long biased traders

As we have seen, onchain perpetual users tend to be biased towards the long side. Bringing one directional flow to the short side, Ethena will put downward pressure on funding rates, creating a more attractive funding rate for other traders to long.

Fees to SNX stakers

Ethena will bring increased volumes, increased liquidity and one sided flow, all of which will drive additional fees to SNX stakers. The nature of the flows and fees generated are also of higher quality vs toxic flow that may arise against SNX stakers as a result of onchain latency.

{USDe as a Permissionless Asset in v3}:

One of the most exciting parts of the rollout of v3 is the potential for governance to vote on new collateral types backing sUSD.

While ETH and stETH are naturally the next logical assets to expand beyond SNX as collateral, Ethena’s USDe could be a uniquely well suited collateral asset to consider. As USDe provides the foundation for stakers to earn both the yield from stETH and also the funding rate on its hedged positions, sUSD has the opportunity to onboard a censorship resistant, stable, yield-bearing asset in staked USDe that can essentially be used as a wrapping asset to capture both forms of yield within sUSD.

This would unlock scalability for sUSD as the size of the collateral pool backing could scale with high capital efficiency.

Our ultimate vision for USDe is a reserve asset within DeFi, and we believe building the stablecoin collateralization on Synthetix to then provide a capital solution for sUSD would provide synergies across both projects.

{What’s Next}:

Throughout the next quarter the Ethena Labs contributors will be running internal testing for the delta-neutral USDe with our investors and whitelisted capital partners. You can apply to join this testphase here.

During our testphase in Q3 we will be linking Synthetix perpetuals to ensure a smooth integration for our hedging positions. Once delta-neutral USDe is released in Q4, Ethena will start placing hedges via Synthetix perps, in what will be our first step in providing the first censorship-resistant, scalable and stable crypto-native solution for money.

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