The Rise and Rise of Synthetic Stables - Analyst Notes

Introduction

Analyst notes is a new type of content introduced by OAK Research. With the multiplication of Interviews, podcasts and X spaces, some interviews get lost, are incomplete or don’t get the recognition they deserve. Our goal is to offer a simpler way for users to find highlights, get context and fact check both participants of selected interviews.

For the first edition of Analyst Notes, we have selected the Gwart Show podcast with Guy Young, CEO of Ethena Labs.

With Ethena’s USDe growth and integrations we thought that it would be interesting to go through some questions asked by Gwart during the interview and provide additional context to some claims that have taken place.

If you find this article interesting, please watch the full interview on Gwart’s channel and don’t hesitate to let him know that you discovered this interview thanks to OAK Research. Let’s dive in.

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Analyst notes

Note 1 : What is Ethena ?

In the beginning of the interview (3:01), Gwart asks Guy Young to give a brief overview of what Ethena does. Guy explains that Ethena’s inspiration came from Arthur Hayes’ piece “dust on crust”.

CONTEXT

The article “Dust on Crust” published by Arthur Hayes in 2023 outlines the foundations of stablecoins at first before going deeper in their core value, which is basically an easier way to access crypto without a need for banks or cash. In this way, crypto actually did create its own financial system through stablecoins, without having to use their bank accounts to purchase or trade crypto.

“The point of stablecoins is not to create a decentralised product where it isn’t needed. Instead, they are simply intended to provide a fiat tokenisation service the banks refuse to offer.“

However, the article goes deeper and explains that stablecoin issuers still rely on banks that might drop them at any point (the article was published in 2023, before the current US administration came in). Therefore, the need for a digital stablecoin that doesn’t rely on the banking system was still present. Hayes also says that this stable coin does not need to be decentralised. This is where he introduces the Nakadollar or “NUSD”.

The idea is simple: 1 NUSD (Nakadollar) = $1 of Bitcoin + Short $1 Bitcoin / USD Inverse Perpetual Swap

Basically, using BTC as collateral, you would use the same amount to short BTC. This represents a synthetic dollar tokenising cash and carry financial instrument. This is how Ethena works todays with its USDe using 3 tokens for its cash and carry: BTC, ETH (as well as Liquid staked ETH) and SOL.

This inspiration from Hayes’ article is outlined in the Ethena docs still to this day.

→ If you want to learn more about stablecoins Ethena launched, we just published an article going deeper in their features and properties:

Note 2 : Stablecoins and their role in the ecosystem

HIGHLIGHT

Later in the interview (7:30), Guy outlines four different use cases for these tokens in the ecosystem today. Here they are:

• Trading collateral on centralized exchanges (The biggest use case today), which is basically speculation on the market
• Store of value for developing countries outside of the US banking system
• Payments
• Savings

We decided to highlight this part of the interview because the point of view presented is quite compelling for stablecoin businesses. The question you have to ask yourself is: which of these four cases could be the one where you can compete with businesses like Tether?

“What do you do which is 10 times better than what they do?”

Then, Guy explains that the two use cases where Ethena can actually compete with Tether are savings and trading collateral.

• As Tether keeps all profits from its business for themselves, Ethena can offer a compelling yield for users.
• For trading collateral, Ethena decided to take a different approach from other stablecoins in the space. They understand that the biggest determinant for stablecoins is not determined by users, but rather exchanges. Users don’t decide which stablecoin they are using on CEX like Binance, but rather you get told which stablecoin you can use for trading.

A little later in the interview, both participants go back to Ethena’s competitive advantage and at 19:11.

“Our advantage sits at neutrality and this is the piece that exchanges got wrong the whole time. They [...] all want to list their own stablecoin because everyone thinks it’s a free-money game to have your own stablecoin. The thing people don’t realise is that they are actually completely useless unless they are used on every venue”

He also adds:

“Every time you try to capture your user with your own stablecoin it’s a net worse user experience on the venue”

ADDITIONAL CONTEXT

Ethena has been pushing for the adoption of USDe within major exchanges in the crypto space. Here are the exchanges where you can trade crypto against USDe as of today: Bybit (Perpetuals and Spot), Bitget (Perpetuals and Spot), Deribit (Perpetuals and Spot), Gate(.)io (Perpetuals and Spot), MEXC (Spot).

As of today, USDe’s biggest volume comes from spot CEX listings against BTC and ETH per Coingecko.

Note 3: Risks associated with the USDe

CONTEXT

There are risks associated with each stablecoin on the market today. According to Guy (12:20), the main risk associated with Ethena is the counterparty risk which is centered around offshore and unregulated exchanges where Ethena might have positions for funding collection

In order to prevent a major problem on one of the centralized exchanges affecting Ethena, they put in place an off-exchange collateral. The reserves used by Ethena for the delta-neutral strategy on various CEX are held outside of the exchange itself. Today Ethena uses Copper and Ceffu for their reserves. Both custodians publish their reserves every month on the Ethena’s Transparency dashboard.

Note 4 : “Ethena is the yield-bearing stablecoin for Tether.”

HIGHLIGHT

After discussing yield within various stablecoins, the Ethena Labs CEO uses this quote (23:40) : “Ethena is the yield-bearing stablecoin for Tether.”

This is actually something that Guy shared on his Twitter this week as well.

As Ethena uses USDT as collateral for its delta-neutral strategy, they essentially create demand for USDT tokens.

Note 5 : Sponsor Segment

As this content has been produced by Gwart, we think it’s important to support him in his content as well as companies that sponsor his podcast. OAK Research is in no way affiliated with The Gwart Show, Ethena or the sponsor of the podcast. It is simply our way to support the content that we used for this article.

If you’re interested in working for a mission-driven company, Ellipsis Labs is hiring engineers passionate about crypto and finance to work on Atlas. You can learn more and apply on Ellipsis Labs’ Twitter @Ellipsis_Labs. Check out Atlas too, @atlasxyz on Twitter, their a fully on-chain orderbook DEX.

Note 6 : Avis sur le marché et la spéculation

At 31:30, the two participants discuss Converge, a blockchain project developed by Ethena Labs. The thesis behind Converge is that RWAs (real asset tokenization) will become increasingly important in the future.

Starting from this point, he drifts on to the market in general and gives his opinion about speculation in general in this industry.

OPINION HIGHLIGHT

“The speculation is getting long in the tooth. We can look at the very basic metrics where alt (altoin) market cap peaked in 2021, Q1 2024 and Q4 2024. It is basically the same number. [...] And to me it was very indicative that we kind of found out how much retail money in the world there was to speculate on what is 99% percent just complete [...] garbage. And we are hitting the same number 3 times in a row, which for me is a pretty strong signal that we are running out of steam on that side of things”

→ We just released a big piece covering Converge with its most recent tech details and vision. You can check it out here:

Note 7 : What about other decentralized stablecoins ?

Later in the interview (42:00), Gwart asks Guy about his opinion on decentralised stablecoins with an emphasis on those using ETH as collateral. He points out that they have continuously lost market share and have never taken off in the same way as Tether or Circle did with their centralized alternatives.

HIGHLIGHT

“I think they are solving for the things that people don’t care about”.

Here are some things that are important for each stablecoin that Guy points out:

• Stability around the dollar.
• Liquidity (but no decentralized stablecoin would be more liquid than USDC or USDT).
• Return (for the stablecoin issuer).

Then, Guy goes on to talk about how you can earn yield through stablecoins: tokenize T-bills or RWAs, overcollateralized lending within DeFi and CeFi perps. In all three of these cases you actually lend your money to someone. In the first case your borrower is the US Government, in the second example you lend to DeFi “degens” and in the third example you lend your money to “degens” in CeFi.

This is basically how Ethena found their product market fit for USDe and seeing an opportunity there.

Note 8 : Tokenization of traditional financial assets

Then (50:00), participants talk about equities on chain and the advantages of putting various stocks and make them available in DeFi directly on various blockchains.

OPINION HIGHLIGHT

The argument that Guy presents here is the advantage of, on the one hand, making these available for trading to anyone, therefore increasing a potential buying pressure by opening it to the markets where it was not accessible previously.

Another advantage of it is the friction when you want to trade both crypto and stocks and where you would have to switch between various assets, while if you are doing it on-chain it would be much easier for everyone and not have to wait for various delays.

And finally, the last argument is the price discovery for a market that is online 24/7 where it would be more efficient for the rest of the markets to have an idea of how an equity is trading.

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Analyst’s conclusion

This interview was a quite interesting one for me and this is why I chose this one for our first ‘Analyst Notes’. Gwart is someone who appears very pro-BTC and less driven by the altcoin market.

The only thing that is missing from this interview is the utility side of the ENA token for Ethena and how its inflation might be offset in the future.

However, overall, it is an interesting perspective on the business Ethena has established. You can see that Guy is someone who is not a maximalist of any chain and cares about creating a profitable business, therefore having a very pragmatic point of view. Ethereum was chosen as the original chain because the DeFi TVL is dominant on Ethereum, not because Ethena values Ethereum’s core principles or aligns with Vitalik’s vision.

I highly recommend checking out the full version of the podcast and giving Gwart a sub on Youtube and Twitter.

https://www.youtube.com/watch?v=uhPrE1y4fGU&t=1367s

You can learn about Ethena through our content by following these links.

→ The various stablecoins Ethena has issued:

→ Learn more about the Converge Chain: