This article was written by Jay Park, Business Advisor at SOOHO.IO.

An examination of a different approach to digital dollar value.

As Korea discusses won-denominated stablecoins, global markets are also exploring alternative ways to maintain a digital asset’s dollar value.

Ethena Labs’ USDe, launched in February 2024, is one such model. Its supply grew to several billion dollars within months, drawing attention to the synthetic-dollar approach.

This article explains its structure, how it differs from reserve-backed stablecoins, and the opportunities and risks involved.

1. What is USDe?

USDe is an Ethereum-based digital asset issued by Ethena Labs. It is a 'Synthetic Dollar', structurally distinct from traditional stablecoins like USDT or USDC.

Its most significant feature is that instead of being backed by traditional financial assets like physical dollars or U.S. Treasuries, it maintains its $1 peg by combining volatile cryptocurrency assets (primarily ETH and stETH) with derivatives positions.

2. What is a "Synthetic Dollar"?

As the name suggests, a "synthetic dollar" is a digital asset that "synthesizes" the value of the dollar using a combination of financial instruments.

• It is not directly backed by or pegged to real-world dollars or traditional financial assets.

• It replicates the value of the dollar through a combination of on-chain assets and derivatives.

• The aim is a crypto-native dollar instrument with less direct dependence on conventional bank reserves, although its operation still involves issuers, custodians, and trading counterparties.

3. USDe vs. Traditional Stablecoins: Key Differences

The following table summarizes the core differences between USDe and traditional stablecoins like USDT/USDC.

4. The Core Mechanism of USDe: The Delta-Neutral Strategy

The stability of USDe is built on a sophisticated financial engineering strategy known as 'delta-neutral'.

1. Asset Deposit: A user deposits Ethereum (ETH) or a liquid staking token (stETH) into the Ethena protocol.

2. Position Establishment: Ethena takes the deposited asset (a long spot position) and simultaneously opens a short futures position for the exact same value on a centralized or decentralized exchange.

3. Value Neutralization:

   • If the price of Ethereum rises: The value of the spot collateral increases, but the short futures position incurs an equivalent loss.

   • If the price of Ethereum falls: The value of the spot collateral decreases, but the short futures position generates an equivalent profit.

In principle, gains on one side offset losses on the other, helping stabilize the position’s dollar value. Maintaining that hedge in practice depends on execution, liquidity, counterparties, and market conditions.

5. The Opportunity: The Source of Its High Yield

Yield is an important part of the model’s appeal. The system’s revenue comes from sources including collateral staking rewards and derivatives funding, with rewards distributed through the relevant staking mechanism.

1. Staking rewards: Eligible collateral such as stETH can earn Ethereum staking rewards; the 3–4% APY cited here reflects the period discussed, not a guaranteed rate.

2. Funding Rate Yield: In perpetual futures markets, when long positions are more dominant than short positions, those holding long positions pay a "funding rate" to those holding short positions. Historically, the crypto market has had a bullish bias, meaning funding rates have often been positive.

Together, these revenue sources can support returns, but both vary with network and market conditions.

6. The Risks: What You Must Understand

As innovative as it is, USDe carries a new set of risks different from those of traditional stablecoins. It is crucial to be aware of the following before engaging with it:

• Funding Rate Risk: This is the most significant risk. If the market enters a prolonged bear phase where funding rates remain negative, Ethena will have to continuously pay out, severely threatening the system's profitability and stability.

• Counterparty and Custody Risk: To maintain its short futures positions, Ethena relies on centralized exchanges (CEXs) like Binance. If one of these exchanges is hacked or goes bankrupt (like the FTX incident), Ethena's collateral could be at risk.

• Smart Contract Risk: The entire logic is executed by code (smart contracts). If there are vulnerabilities or bugs in the code, it could be exploited by hackers, leading to a loss of funds.

• Liquidity and De-pegging Risk: During periods of extreme market volatility, the orderly liquidation of collateral may be disrupted, or liquidity in the futures market could dry up, potentially causing a temporary break in the $1 peg.

Conclusion: New Possibilities and a Cautious Approach

USDe explores a different way to construct dollar-linked value using crypto assets and derivatives. It may improve capital efficiency in some contexts, but that potential must be evaluated alongside the model’s dependencies.

However, beneath the surface lie complex, novel risks such as funding rates and counterparty exposure. Therefore, it is crucial to approach USDe not as a "safe savings account," but as a "complex financial product that pursues high yields."

Anyone assessing USDe should understand its mechanics, counterparties, liquidity, and risk controls before making a decision.

A Note on Korean Stablecoin Trends and SOOHO.IO's Contribution

In Korea, the concept of 'Purpose-Bound Money' (PBM), which applies technical restrictions to limit the use of funds to specific purposes, is gaining traction.

SOOHO.IO’s participation in the Bank of Korea’s CBDC pilot has provided experience with programmable digital vouchers and PBM. The team is applying that experience to practical digital asset infrastructure suited to Korea’s requirements.

* Disclaimer: This content is for informational and educational purposes only and should not be construed as financial advice. The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of SOOHO.IO. Always consult with a qualified financial advisor before making any investment decisions.