Innovative Encryption Stablecoin USDe: Balancing the Advantages of Decentralized Finance and CeFi

Recently, the cryptocurrency market has seen the emergence of a new type of stablecoin, USDe, which adopts a unique structural design in an attempt to find a balance between decentralized and centralized finance. This stablecoin was born against the backdrop of traditional centralized stablecoins dominating the market, decentralized stablecoins facing collateral centralization issues, and the impact of certain algorithmic stablecoin collapse events.

The core mechanism of USDe is to provide margin by hosting assets on-chain and mapping those assets to centralized exchanges. This approach retains the transparency and fund isolation characteristics of Decentralized Finance while leveraging the ample liquidity of CeFi. Its underlying yield sources include Ethereum staking rewards and the funding rate income generated from the exchange's hedged positions.

Currently, the USDe ecosystem includes three main assets:

1. USDe - stablecoin, can be minted by depositing stETH.
2. sUSDe - The certificate token obtained after staking USDe.
3. ENA - Governance token for the protocol, currently distributed through a points system.

The Minting and Redemption Mechanism of USDe

Users can mint USDe at a 1:1 ratio by depositing stETH. The deposited assets are custodied by a third party and are mapped to the exchange through an "over-the-counter settlement" method. The protocol then establishes a short perpetual contract position for ETH on the exchange, ensuring that the value of the collateral remains stable.

Ordinary users can obtain USDe from the public liquidity pool, while vetted institutions can directly mint and redeem through contracts. This design ensures that assets are always transparently custodied on-chain, reducing traditional financial risks.

Innovative Fund Custody Methods

USDe adopts a funding custody method called "over-the-counter settlement" ( OES ), which combines on-chain transparency with the capital utilization efficiency of centralized exchanges.

OES uses multi-party computation (MPC) technology to construct a custody address, jointly managed by users and custodial institutions. This method ensures both the transparency and decentralization of assets while reducing counterparty risk.

By collaborating with exchanges, OES allows the mapping of custodial asset balances to the exchange for financial services such as derivatives trading. This enables the Ethena protocol to perform hedging operations on the exchange while keeping the funds on the custodial chain.

Sources of Income and Sustainability

The yield of USD is mainly derived from two aspects:

1. Ethereum Staking Rewards
2. The funding rate generated by short positions on the exchange and the profits from basis trading.

The funding rate is a fee paid periodically based on the price difference between the spot and perpetual contract markets. The basis is the deviation between the spot and futures prices, which gradually converges as the futures contract approaches expiration.

The Ethena protocol provides diversified returns for USDe holders by flexibly utilizing these strategies. However, the yield is subject to fluctuations influenced by market sentiment. Recently, due to a cooling in the market, the protocol's yield has retreated from its peak.

Scalability and Market Positioning

The scalability of USDe is mainly limited by the total amount of open contracts in the ETH perpetual market. Currently, the ETH and BTC perpetual contract markets are relatively large, providing some growth space for USDe.

However, excessive expansion may lead to a decrease in funding rates or even turn negative, affecting protocol yields. Therefore, USDe needs to seek a balance between scale expansion and yield. In the long run, the development of USDe may fluctuate with market conditions.

Overall, USDe is expected to become a high-yield, relatively limited scale, market-linked stablecoin product.

Potential Risks

1. Funding rate risk: Insufficient market bullishness or excessive issuance of USD may lead to negative returns.
2. Custody risk: Dependence on OES and centralized institution services.
3. Liquidity risk: Large-scale position adjustments may face insufficient liquidity.
4. Asset anchoring risk: The decoupling of stETH from ETH may trigger liquidation.

To address these risks, Ethena has established an insurance fund, extracting a portion of the protocol's revenue as reserves.

Overall, USDe represents an innovative attempt in the stablecoin market, combining the advantages of Decentralized Finance and CeFi, but its long-term development still needs to be tested by the market.