Learn about Ethena USDe Staking
Can I stake USDe?
USDe, a synthetic stablecoin by Ethena, maintains stability and its peg to the US dollar through an automated delta-neutral hedging strategy relative to underlying collateral assets. This strategy involves establishing short perpetual positions on derivatives exchanges and matching the value of ETH and BTC collateral to mitigate exposure to cryptocurrency volatility. There are a few options to earn rewards on USDe holdings:
Native Yield: To stake USDe, users can deposit their USDe tokens to obtain sUSDe, which provides access to the protocol's generated yield. This process allows USDe to serve as a stable, yield-generating collateral for DeFi applications, making it potentially valuable for both investors and traders seeking stable assets with high returns. Staking USDe and acquiring sUSDe automatically grants users access to protocol rewards without requiring any further action. sUSDe is a reward-bearing token that appreciates over time. Its value is tied to the exchange rate between the derivative token and the staked asset. Additionally, the value of sUSDe remains stable even in scenarios of negative yields, as the assets are locked in the staking contract and cannot be withdrawn. Any potential losses are expected to be covered by Ethena's Insurance Fund, providing added security to stakers.
Provide Liquidity: Users have the opportunity to earn rewards with USDe by supplying liquidity on decentralized exchanges. Adding USDe to a liquidity pool enables users to receive a portion of the trading fees generated by the pool, a process commonly referred to as liquidity mining or provision. Users can supply USDe on protocols such as Curve and join one of the biggest stablecoin pools.
How much can I earn staking USDe?
The potential earnings generated from USDe staking may fluctuate depending on various factors, including the stETH yield, funding, staked amount, duration of staking, market demand, and the specific staking platform or mechanism utilized.
Native Yield: The Ethena protocol offers native yield, providing USDe with an advantage over other stablecoins. Yield is generated through two primary income streams: staked asset consensus and execution layer rewards and perpetual swaps spreads and funding. ETH LSTs generate inflationary rewards from the consensus layer, execution layer fees, and MEV capture. Perpetual swaps generate income through funding rates, with Ethena maintaining short positions to protect against fluctuations in the USD value of staked ETH. The expectation is to benefit from positive funding rates. However, both yield streams are subject to changes in APY and funding rates, influenced by Ethereum's staking yield and market conditions. Ethena diversifies its collateral positions across leading centralized exchanges to mitigate exposure and optimize yield.
Providing Liquidity: Users have the option to supply USDe to a liquidity pool and earn a portion of the fees generated by decentralized exchange users. Rewards are influenced by the size and popularity of the liquidity pool, as well as the user's share within the pool. Higher trading volume within the pool typically results in increased earnings.
What are the risks of staking USDe?
Yield Generation: Ethena's innovative approach to synthetic stablecoins, coupled with its yield generation mechanism, introduces potential risks due to its recent launch and untested mechanisms. One major concern revolves around how the protocol would function during prolonged periods of negative funding rates, potentially causing USDe to deviate from its peg downwards. The Reserve Fund serves as a safety measure, deploying capital to cover negative funding periods and acting as a buyer of last resort for USDe in open markets.
Counterparty Risk: Ethena faces counterparty risk from derivative centralized exchanges and custodial risk where custodians hold protocol-backing assets and there is a dependence upon their operational ability.
Liquidation Risk: All futures contracts face potential liquidation risks from diverging collateral values, and risks associated with the utilization of LSTs as collateral.
Platform Risk: DeFi lending platforms are susceptible to cyberattacks, where successful breaches can lead to significant losses of staked assets. Moreover, operational shortcomings, technical glitches, or managerial lapses can disrupt access to deposited USDe and adversely affect the platform's operational integrity and dependability.
How Ethena innovated the stablecoin market?
Ethena's innovation in the stablecoin market stems from its unique approach to digital dollar derivatives and yield generation mechanism. The whole idea for a stablecoin with such a design originated from Arthur Hayes and his concept for a new approach to stable digital currencies. You can read his article Dust on Crust to dive deeper into the fundamentals that led to Ethena and USDe's creation.
By pairing stability with yield, Ethena introduces a novel concept that combines stability with the potential for earning yield. This approach offers users the benefits of a stable asset while also providing opportunities for passive income generation. Ethena has devised an innovative approach to stablecoins by implementing a delta-neutral trading strategy to maintain stability and generate yield. Here's how it works:
Ethena employs a robust trading strategy that maintains the value of the initial investment while generating additional yield, irrespective of market price fluctuations. For every dollar in Ethena, there is a corresponding long position (which profits when the price rises) and a simultaneous short position (which profits when the price falls) in a selected asset like ETH or BTC. This is known as a delta-neutral strategy, which balances gains and losses from price movements to keep the USDe price stable. Essentially, Ethena's stablecoin represents the capital used in this strategy, where the value remains stable and accrues yield over time.