1. Development of the Stablecoin Market
2. Decentralized Synthetic Stablecoins
3. Depegging Scenarios and Alternatives

The synthetic stablecoin market is a dynamic part of decentralized finance (DeFi), and Ethena has left a significant mark with its innovative product. With high yields on its synthetic dollar, USDe, Ethena has captured a total value locked (TVL) of $2.7 billion, demonstrating demand for synthetic stablecoins despite the overwhelming dominance of their asset-backed equivalents. However, as with any groundbreaking product, there are risks associated with the strategy Ethena employs, especially relating to its reliance on USDT-margined contracts.

Development of the Stablecoin Market

Stablecoins are a key tool for moving in and out of the crypto world. Stablecoins backed by traditional financial assets, such as Tether (USDT) and USD Coin (USDC), are currently the most popular, and both rely on the banking system as they hold their collateral in fiat money and its derivatives. The collapse of Silicon Valley Bank (SVB) in early 2023 highlighted the potential risks of stablecoins. During the collapse, USDC temporarily depegged to $0.88, creating panic as a significant portion of the market’s liquidity was tied up in the stablecoin. The rise of projects such as Ethena, Frax, UXD, or Elixir is a direct response to the growing market demand for yield-bearing stablecoins.

Decentralized Synthetic Stablecoins

In his well-known “Dust on Crust” essay, Arthur Hayes outlined an alternative vision for synthetic stablecoins that avoids dependence on the traditional financial system. Hayes proposed using BTC-margined contracts to maintain the synthetic stablecoin’s peg to the US dollar. This could create a synthetic stablecoin that would not rely on fiat-backed assets such as USDT and would thus be insulated from the shutdowns, collapses, and liquidity restrictions of traditional finance. Ethena, unlike this vision, relies on USDT-margined contracts, which allows it to offer high yields but also introduces additional risks.

Depegging Scenarios and Alternatives

Ethena would be vulnerable in the case of a USDT depeg. Let’s explore a hypothetical scenario: - Position: A $55,000 short position on BTC/USDT-margined perpetual contracts from Ethena. - USDT depegging: USDT falls from $1 to $0.80. - BTC price: Initially $55,000, after depegging increases by 25% to 68,750 USDT. This scenario illustrates collateral erosion for users. If users initially posted $55,000 in collateral, that value would decrease by 20%, leaving them with only $44,000 to cover the position.

The synthetic stablecoin market is expanding, and users are looking for stable assets that also provide yield. Ethena has proven its ability to meet this demand, building substantial TVL and offering an appealing high-yield product. While its reliance on USDT introduces risks, Ethena’s innovation in the space has positioned it as a key player. As the market grows, transparency, risk management, and minting practices will become essential for sustainable success.