Ethena is a synthetic dollar protocol built on the Ethereum blockchain, designed to provide a crypto-native solution for money in the form of its synthetic dollar, USDe, and a globally accessible dollar savings asset, sUSDe. Unlike traditional fiat-backed stablecoins, USDe maintains its peg through a delta-hedging strategy involving crypto assets and corresponding short futures positions ^[1].

Overview

Ethena aims to offer a scalable and censorship-resistant digital dollar that operates entirely within the cryptocurrency ecosystem. The protocol's core innovation lies in its method of maintaining USDe's stability, which involves holding a combination of spot crypto assets (such as Bitcoin, Ethereum, and Solana) and simultaneously opening short positions in perpetual and deliverable futures contracts on these assets. This delta-neutral approach is intended to offset price fluctuations in the underlying collateral, thereby maintaining USDe's value relative to the US dollar ^[1].

The design of USDe also incorporates liquid stablecoins like USDC and USDT. These assets serve multiple purposes within the protocol: they enhance the efficiency of the delta hedging process and can act as a safeguard during bear markets when funding rates and futures basis might be unfavorable. Additionally, these liquid stablecoins may generate rewards depending on where they are held, contributing to the overall protocol revenue. Ethena emphasizes that USDe is fully-backed, though it advises users to review its comprehensive risk section for potential scenarios that could lead to a loss of backing ^[1].

USDe Stability

The peg stability of USDe is maintained through a delta-neutral hedging strategy, which insulates the value of its backing assets from market volatility ^[3]. In finance, "delta" measures the sensitivity of a derivative contract's price to changes in the price of its underlying asset. A portfolio is considered "delta-neutral" if its delta is zero, meaning its value is not affected by price fluctuations of the underlying asset ^[2].

Ethena achieves this by programmatically balancing its holdings of spot crypto assets with corresponding short positions in derivatives markets. For example, when a user mints USDe by providing 1 ETH, the protocol gains a positive delta of 1 ETH. To neutralize this exposure, Ethena simultaneously opens a short perpetual contract with a nominal value equal to that 1 ETH. This action brings the portfolio's net delta to zero. As a result, the total USD value of the backing remains stable regardless of market conditions; any gains from a rise in the spot price of ETH are offset by losses on the short position, and vice versa ^[2].

This automated hedging mechanism ensures that the synthetic USD value of the backing assets remains relatively constant. Ethena operates with no effective leverage, as the size of the short derivative positions is designed to match the value of the backing assets. The protocol does not use any material leverage for its hedging positions, apart from minor leverage that may arise naturally from exchanges applying small discounts to the value of assets used as collateral ^{[3] [2]}.

The protocol uses both perpetual and deliverable futures for hedging. The inclusion of liquid stablecoins like USDC and USDT in the backing assets adds flexibility and efficiency to the hedging process, particularly by serving as a buffer during periods of high market volatility or unfavorable funding rates ^[3].

Backing Assets and Custody

Ethena employs a robust system for the custody and security of its backing assets. A significant aspect of this system is the use of off-exchange settlement solutions. This means that the underlying crypto assets and collateral for derivatives positions are held with third-party custodians rather than directly on centralized exchanges. This approach aims to mitigate exchange failure risk and custodial risk by reducing direct exposure to exchange-specific vulnerabilities ^[4].

The protocol also provides real-time dashboards to offer transparency regarding its backing assets and hedging positions. Key trust assumptions within the solution design include the use of multisignature wallets and timelocks for critical operations, enhancing security and requiring multiple approvals for significant actions ^{[5] [6]}.

Minting and Redemption

Users can acquire USDe through two primary methods:

• Permissionless Acquisition: Users can obtain USDe by interacting with external Automated Market Maker (AMM) pools, exchanging assets like USDT or USDC for USDe.
• Direct Minting: Approved market-making counterparties, after clearing Know Your Customer (KYC) and Know Your Business (KYB) checks, can directly mint USDe by transferring accepted reserve assets to the protocol. Similarly, these approved entities can directly redeem USDe by burning their tokens and receiving the backing assets ^[1].

The minting and redemption processes are governed by specific smart contracts, which include order validity checks and user security measures to ensure secure transactions ^[7].

Staking USDe (sUSDe)

Ethena offers sUSDe, a staked version of USDe, which allows users in permitted jurisdictions to earn rewards derived from the protocol's revenue. The protocol generates revenue primarily from the funding rates of its short futures positions and, potentially, from yields on liquid stablecoins held as backing. These revenues are distributed to sUSDe holders, providing a yield-bearing dollar savings asset within the crypto ecosystem ^{[8] [9]}.

Hedging System and Oracles

Ethena's hedging system manages derivatives positions across various exchanges, incorporating internal services for trade monitoring and execution, and mechanisms to mitigate risks from external dependencies. Oracles provide accurate, real-time price data for the underlying crypto assets, which is crucial for maintaining the delta-neutral hedge and ensuring the correct valuation of backing assets ^{[10] [11]}.

Tokenomics

Ethena features its native governance token, ENA. The tokenomics of ENA are detailed within the protocol's documentation, outlining its supply, distribution, and utility within the Ethena ecosystem, particularly concerning governance and protocol decision-making ^[12].

Risks

Ethena acknowledges several inherent risks associated with its synthetic dollar model, which differ from those of traditional fiat-backed stablecoins. These risks are extensively detailed in the protocol's documentation:

• Funding Risk: The risk that negative funding rates on perpetual futures contracts could outweigh the yield generated from staked assets, leading to a decrease in the protocol's reserve fund.
• Liquidation Risk: The possibility of collateral being liquidated on derivatives exchanges if market movements are sudden and severe, and the protocol's hedging mechanisms fail to respond adequately.
• Backing Assets Risk: Risks related to the underlying crypto assets themselves, such as smart contract vulnerabilities, de-pegging of liquid stablecoins used as backing, or significant price volatility.
• Stablecoin-Related Risks: General risks inherent to stablecoins, including regulatory scrutiny, market acceptance, and the potential for a loss of peg.
• Margin Collateral Risks: Risks associated with the specific types of collateral accepted for margin on derivatives exchanges, including their liquidity and volatility ^[13].

Governance

Ethena's governance structure includes a Risk Committee, which plays a crucial role in overseeing and managing the protocol's risk parameters. This committee is responsible for assessing and advising on various risks, contributing to the overall stability and security of the Ethena protocol ^[14].