Conversation with Ethena founders: USDe jumps to the top three, $260 million buyback launches, where is ENA on the tuyere?

Original title: Hivemind: Ethena Founder, the GENIUS Act & Overvalued L1s

Original author: Empire

Original compilation: Vernacular blockchain

Recently, Ethena's (ENA) USDe stablecoin has become popular, with its market capitalization soaring from $140 million to $7.2 billion in one year, soaring more than 50 times. After the passage of the GENIUS Act, Ethena Labs quickly partnered with Anchorage Digital, a U.S. federal crypto bank, to launch the first GENIUS-compliant, federally regulated stablecoin USDtb, bringing compliant stablecoins to U.S. retail investors. At the same time, StableCoinX was launched, raising $360 million, planning to list on Nasdaq, and launching a $260 million buyback program, setting off a market boom.

Recently, Ethena founder Guy Young was interviewed by Hive Mind anchor Jose Madu to reveal the reasons for Ethena's rapid rise in the stablecoin track and his views on the current market landscape.

The following is an excerpt from the podcast:

Q1: Guy, you made a big announcement about USDe assets this week, entering the Treasury company space. Can you share some background and why it's important?

Guy Young: Absolutely. We started preparing for this project at the beginning of this year, in December or January. At that time, the market was not as hot as it is now, and now similar projects are emerging almost every day. Seeing Circle's performance in the open market, we realized that the demand for these topics in the traditional market far exceeded the supply, and a lot of capital wanted to invest in them, which was an interesting opportunity for us.

From a macro perspective, I have been concerned about altcoin flows in cryptocurrencies for the past 18 months. The total altcoin market cap peak in 2021 and 2024 is almost identical, just under $1.2 trillion. This is a strong signal to me that the global willingness to invest in these 99% bubble tokens has limited funds. The industry needs to mature, and to break through the $1.2 trillion market cap, it must attract investors in the equity market who handle large amounts of money.

What we are looking at is not short-term trading with a high premium on assets, but opening up a broader investor base, even providing token access at 1x net asset value is stronger than not having access to these markets at all. This is an interesting match, the traditional market is in high demand for these themes, while the crypto market is facing liquidity issues, and our solution is the solution.

Q2: It's exciting about USDe assets. When to start trading? How much money was raised in total? Can you share more details? Ethena Labs tweeted that this is the project with the highest cash-to-asset market capitalization ratio, can you talk more about this?

Guy Young: The total scale of the project is about $360 million, of which $260 million is cash. Our cash ratio is much higher than other similar projects, as many projects are just tools to exit liquidity, and investors want to sell their tokens on the open market after investing them. Our goal is to introduce new cash and solve the problem of cash flow. The funds raised by Ethena account for about 8% of the circulating market capitalization and will be used to buy tokens on the open market, compared to Hype, which ranks second, with less than 2%. This is very prominent in the market, compared to the scale of the underlying assets, our project volume is large, and the cash raised will have a significant reflection effect on the token. For example, $500 million has little impact on Ethereum, but it has a significant impact on our token.

Q3: The demand for pure equity exposure for stablecoins is strong, and the regulatory environment is becoming more and more friendly, such as the passage of the Genius bill and the enthusiastic market pursuit of Circle. Can you talk about the challenges Circle faces, such as the impact of lower Treasury interest rates on your business?

Guy Young: Thanks for the question. I will analyze the appeal of Ethena for public market investors and institutional audiences, as well as the workings and competitive advantages of USDe.

The use cases for stablecoins are diverse, such as as as collateral for transactions on centralized exchanges or providing dollar payments and remittances for developing countries. In the future, each issuer will be deeply involved in a specific market segment rather than trying to become a one-size-fits-all solution.

Ethena's strategy is clear: we focus on use cases that do 10 times better than other players. As a startup, competing with giants with a market capitalization of tens of billions, we don't think we can win across the board, but choose to focus on savings use cases.

A dollar asset with a higher structural return is a better savings tool than an asset with no return. This advantage extends to other scenarios, such as being used as collateral for perpetual contracts or embedding DeFi applications to create new products. This is Ethena's segment and the area where we are achieving growth.

In 2024, USDe will have an average annualized yield of 18%, which is four times the interest income of Circle. Adjusted for earnings, Ethena's asset size is equivalent to $28 billion, which is comparable to Circle. This means that without a huge balance sheet, we can rival the giants in terms of revenue.

As for competitors, we see Tether as a partner, not an adversary. Many people don't understand that Ethena actually helps Tether holders around the world. In centralized finance (CeFi), 70% of the perpetual contract market is denominated in Tether, and $1 of collateral flowing into Ethena translates into about 70 cents of Tether supply growth. Tether does not offer yield because its yield is paid indirectly by the market through futures and basis trading.

Ethena productizes Tether's basis capture use case in CeFi to create a new product. It can be said that Ethena is the "yield version" of Tether, and most of the collateral we hold is Tether itself, which has a significant role in promoting Tether's growth.

Q4: Audiences may not be familiar with Ethena, but can you briefly describe how you generate revenue?

Guy Young: The core strategy is cash arbitrage or basis trading: go long on spot while shorting futures or perpetual contracts. There is a funding rate in the cryptocurrency market, which is simply understood as the cost of capital for going long. These markets rise over time, and investors are willing to pay for going long on leverage. Ethena profits by capturing speculative premiums in the derivatives market.

By analogy, all US dollar assets or stablecoins are a form of lending. Buying Circle's USDC is equivalent to lending money to the U.S. government in exchange for IOUs; Buying Sky's USD assets is to borrow with Ethereum overcollateralization in DeFi; USDe, on the other hand, provides financing for long positions in CeFi. Different borrowers determine different rates of return.

Q5: In the 2021 cycle, basis trading of some major currencies is as high as 50-60% for several months. But now, with the increase in liquidity in the futures market, the addition of professional money managers and ETFs, the basis has been significantly compressed. What are some of the dynamics you've experienced internally? How do you think this will evolve with the launch of long-tail assets like Solana ETFs and more opportunities for professional money managers?

Guy Young：The basis trading capital pools of ETFs and CMEs (Chicago Mercantile Exchange) are very different from those of the cryptocurrency market. Institutions like Millennium are unable to put money into the cryptocurrency market due to the need for AA-rated custodians. As a result, traditional finance (TradFi) conducts a large number of transactions on CME, where credit risk is almost zero, but the cryptocurrency market cannot be touched. This results in a significant difference between CME's basis and that of the cryptocurrency market, reflecting some of the exchange's credit risk.

2024 data shows that CME's cash-adjusted basis is about 6.5%, 150 basis points higher than Treasury yields, while Ethena's USDe yield is 18%, a gap of up to 1,000 basis points. Although CME supports these transactions, it is more efficient through Ethena.

Many hedge funds put their money into Ethena because USDe is not all for staking (sUSDe). When USDe is used as a currency in an AMM (automated market maker) or order book, the staking rate does not reach 100%, so Ethena's yield is always higher than the yield of self-capturing basis. Although the basis will compress over time, we expect institutional capital to flow through Ethena as it is a more efficient channel. This is one of our investment logics. Some criticize the basis for falling from 60% when we launched, but this is natural. Ethena has grown in the process by reducing the cost of capital in the cryptocurrency market to a reasonable interest rate (e.g., 10-12%) for traditional finance instead of 20-30%.

Q6: Usually, people focus on high funding rates for certain coins, but Ethena lowers these rates, which may mask the size or speculation of long positions. What do you think about this?

Guy Young: That's true. The market is hotter than before Ethena, especially on BTC and ETH. It's a good idea to look at Hyperliquid's funding rates. Currently, Hyperliquid's funding rate is about 25%, while Binance's is 11%. There are two reasons: first, Hyperliquid's retail capital flow is more natural, and centralized exchanges have more institutional investors; Second, Hyperliquid has no portfolio margin and cannot use $100 in BTC to fully collateralize $100 perpetual contracts to short it.

Therefore, its funding interest rate needs to be adjusted to compare with CeFi. Ethena does not yet operate on Hyperliquid, so Hyperliquid reflects the real retail capital flow that is not affected by institutional capital and Ethena, and is an ideal reference point to judge the true heat of the market.

Q7: The cryptocurrency space has recently witnessed a long-awaited event - the passage of the Genius Act, the first federal law on stablecoins. You announced a partnership with Anchorage, which seems to make you the first stablecoin to comply with the Genius Act. Can you talk about the Genius Act, your thoughts on it, and the details of this collaboration and what it means for Ethena?

Guy Young: We are changing the issuance structure from an offshore BVI entity to a direct issuance of USDtb by Anchorage. Anchorage, the only federally regulated bank in the U.S. that deals with cryptocurrencies, will launch a suite of products similar to "Genius services" for different issuers to meet compliance requirements. Our strategy is dual-track: by partnering with Anchorage, USDtb will be Genius compliant and can be used in any scenario where payment stablecoins are allowed in the United States; USDe, on the other hand, mainly exists in the offshore DeFi market and is not within the regulated financial system in the United States.

Both markets are important, but the excitement of our entry into the US market is that the main use cases for stablecoins are actually outside the US. Americans can already get instant digital cash through apps like Venmo, just in a different form. The U.S. market is also more competitive, as money market funds coexist with stablecoins, limiting income potential. While we are excited to enter the U.S. market, the offshore market remains the most dynamic place to operate. This is evidenced by the success of Tether, which has focused on the offshore market from the beginning.

Q8: I'm curious, the stablecoin market is hot right now, and everyone is discussing them. Every big company seems to have its own stablecoin strategy, and there are many infrastructure startups like the Tether chain or something else being built. What do you think about this? You should have a deep insight into the market. What is the most interesting thing about the stablecoin market right now? Which ones are overrated? Which ones are underrated?

Guy Young: I'm quite pessimistic about new issuers entering the market and competing with existing giants. The market is excited about this topic, but it is difficult to find a breakout point. Stablecoin products are highly commoditized, making it difficult for startups to distinguish themselves from established giants.

Stablecoins need to meet three conditions: they must be in US dollars, otherwise they will be out the next day; In terms of liquidity, you can't reach Tether's $100 billion daily trading volume on the first day; The third is return.

If stablecoins are backed by Treasury bonds, profit margins will become a race to the bottom. Circle has started this competition to share the proceeds with Coinbase and others. I have a negative view of the unit economy and business model of stablecoin issuers. Tether is an exception, having established an unshakable position at a unique point in time. No one can replicate their success at that particular moment. I am pessimistic about the new issuer's claim of sharing 90% of the proceeds, which is a difficult road. For a business model to work, you need a $100 billion scale to be an attractive investment if you only make 5 to 10 basis points in profit. Therefore, I am the most pessimistic about this part of the market, even though we ourselves are the issuers of the US dollar and stablecoins.

Q9: We discussed stablecoins before, and if $3.5 trillion becomes liquid stablecoins, especially into the crypto market, some of the funds may flow to Bitcoin, which is very exciting. The crypto market has been doing well recently, with the ETH to BTC ratio returning to above 0.03, outperforming BTC. Solana is also doing well. What do you think? Will the market continue to rise? What stage of the cycle are we in?

Guy Young: In the long run, I am still very bearish on ETH and other Layer 1 (L1) assets, believing that they are the most overvalued financial assets in history. In the short term, the narrative of ETH has changed, no longer competing with Solana for on-chain activities, but positioning itself as a tool to attract traditional financial funds and compete with BTC.

As long as these instruments trade at 2.5 to 4x net asset value (NAV), the market will not fall. But if the premium slides from 1.5x to 1x, it may be a signal of the end of the cycle. When new instruments stop coming online, the premium may collapse because existing instruments need buying support from the equity market. Without enough buying, the market may collapse. Now that new capital is still flowing in and market enthusiasm is high, for example, Saylor has just increased its issuance size from $500 million to $2 billion, and instruments are still trading at a high premium, and this trend may continue. But watch out for signs of slowing down with new tools, which could be a turning point in the market.

I won't comment on my own projects, but examples like Hyperliquid have moved away from dependence on ETH or L1 and are growing on cash flow, like real equity-like assets. Altcoins need to mature, no longer just betas of L1, but have independent revenue and users. In the future, 5 to 10 projects like Hyperliquid may be priced with equity investment logic, decoupled from L1. I think BTC should dominate 90%, other L1 valuations should drop to one-tenth of what they are now, and minority equity businesses will stand out, like Coinbase and Robinhood have done this year.

Q10: Regarding Ethena, the scale of USDe has reached US$6.8 billion. How big do you think the market can support? If everyone knows Ethena's earnings, how much can the perpetual futures market support?

Guy Young: The market potential is huge. Currently, open interest is about $110 billion to $120 billion, with a yield of 15-20%. The three major sources of cash flow in the crypto space are Binance equity, Tether equity, and basis trading in the futures market. Ethena accounts for 6-10% of the derivatives market, I think it should be 20-25%, or $20 billion to $30 billion, assuming the market doesn't grow significantly.

When the financing rate reached 30% in December last year, Ethena had reached $28.8 billion, and if it is connected to traditional financial institutions, it may be even larger, and the interest rate will be compressed to 10-12%. However, if L1 valuations fall, L1-dependent products like Hyperliquid and Ethena will also be affected. A few projects like Pump make money through new token issuances and do not rely entirely on L1 valuations.