Financial instruments tied to the United States dollar offer a new frontier for markets outside the country. That’s the bet of Ethena Labs, a startup getting $14 million in funding for an Ethereum-based synthetic dollar.
Ethena’s team disclosed the funding on Feb. 16, backed by venture capital firm Dragonfly, among other investors. An earlier round of investment in 2023 landed the startup $6 million from Binance Labs, Gemini, Bybit, Mirana Ventures, OKX Ventures and Deribit to bootstrap decentralized finance solutions built on the Ethereum network.
The capital will support the USDe, a synthetic dollar backed by delta-hedging strategies using staked Ether (ETH) as collateral. The product has amassed $200 million in total value locked since its launch in December, according to data from DefiLlama.
“USDe maintains its rough target to the U.S. dollar by delta-hedging assets provided by users minting USDe to short-staked Ethereum collateral using perpetual swaps to achieve ‘delta-neutral’ stability,” the company explained in a statement shared with Cointelegraph.
In other words, USDe maintains its peg to the U.S. dollar through a combination of hedging strategies. It uses financial derivatives, such as arbitrage and perpetual swaps contracts, to ensure that the value of the digital currency remains constant with the dollar, a different approach from typical stablecoins that use direct collateral or algorithmic methods to maintain their value.
“We view stablecoins as the single most important instrument within crypto and the only idea which has found true product market fit, with more than $130bn of global demand despite issuers fully internalizing the yield,” noted Ethena Labs CEO Guy Young.
For instance, the leading stablecoin issuer Tether Holdings Limited posted $2.85 billion in “record-breaking net profit” in the last quarter of 2023, driven by yields from its Tether (USDT) reserves, including around $1 billion in interest from United States Treasury securities, which back up most of the stablecoin’s assets.
“The entire space relies on centralized stablecoins with collateral backing residing within the banking system — providing a crypto-native synthetic dollar alternative is, in our view, the single largest opportunity within the space.”
However, having delta-hedging does not mean the synthetic dollar is free of risks. Liquidity and counterparty risks in times of market stress and unexpected events are always around the corner. To mitigate such risks, the startup claims to have collateral held and settled by institutional-grade firms such as Fireblocks, Copper and Bitgo.
“Stablecoins have grown massively in popularity over the past few years by providing access to USD-denominated savings and remittances for people around the world, but they’ve always been handicapped by one of these three issues [stability, censorship and capital efficiency],” said Tom Schmidt, general partner at Dragonfly, calling the synthetic product the “holy grail of crypto dollars.”
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