Ethena Labs Adds Bitcoin As Backing Asset For USDe

Table of Contents

• Ethena Labs Adds Bitcoin Backing
• Ethena’s Delta Hedging Strategy 

Decentralized Finance (DeFi) protocol Ethena Labs has announced the addition of Bitcoin as one of the backing assets for its synthetic dollar-pegged stablecoin. The USDe is already backed by ETH, ETH-based liquid staking tokens, and Tether (USDT). 

According to Ethena Labs, the move will help USDe scale significantly and provide users with a safer product. 

Ethena Labs Adds Bitcoin Backing

Ethena Lab’s decision to add Bitcoin comes as Bitcoin derivatives markets outpace their ETH-based counterparts. According to data presented by Ethena, Bitcoin’s open interest has registered a 150% jump to $25 billion in the past year. In comparison, ETH open interest registered a 100% growth, moving to $10 billion in the same period. This liquidity and the increased scaling potential of the BTC derivatives markets are key factors driving Ethena’s move to include Bitcoin. 

“Excited to announce that Ethena has onboarded BTC as a backing asset to USDe. This is a crucial unlock that will enable USDe to scale significantly from the current $2bn supply. “BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity for delta hedging.”

The protocol stated in a post on X, 

“BTC also provides a better liquidity and duration profile vs liquid staking tokens. As Ethena scales closer towards $10bn, this provides a more robust backing, and ultimately a safer product for users.”

USDe went live on Ethereum on February 19th. At the time, Ethena promised an annual percentage yield of 27.6% on staked USD3, leading to significant concerns within the community. The stablecoin’s APY topped out at 113% on March 5th and has since fallen to 7.15%. 

Ethena’s Delta Hedging Strategy 

Ethena has adopted a delta hedging strategy in the derivatives market to maintain the USDe peg. For example, Ethena can maintain short positions in ETH or ETH-based derivatives that become rewarding when the price of ETH drops. As a result, it can offset any downward volatility from USDe’s collateral to a considerable extent. Before adding Bitcoin to its backing assets, USDe was backed by Ether (ETH), Tether (USDT), and ETH-based liquid staking tokens in proportions of 45%, 38%, and 17%. 

A bulk of this collateral is sourced from platforms such as Binance, ByBit, OKX, DEribit, Bitget, and BitMEX. The protocol acknowledged that Bitcoin does not offer native staking yield but argued that staking yields of only 3-4% are less significant during bull markets where funding rates can exceed 30%. Ethena is attempting to differentiate its synthetic dollar product by reducing its reliance on the traditional banking system. USDe is currently the 5th largest among US-dollar-denominated products, according to data from CoinGecko.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.