Ethena 2024 Roadmap: How We Will Seize the Holy Grail of Cryptocurrency

Original Title: Ethena 2024 Roadmap: The Holy Grail: Internet Money

Original Author: Ethena

Original Compilation: GaryMa, Wu Says Blockchain

Abstract

This article aims to outline Ethena's roadmap and unified vision for the coming months.

i) Why we believe Ethena is important

ii) What excites us: the integration of USDe with DeFi, CeFi, and TradFi

iii) Ethena's ultimate goal: currency, network, trading

Why is Ethena important?

The holy grail of cryptocurrency has always been to achieve monetary status.

Bitcoin was initially envisioned as a peer-to-peer electronic currency, but over time it has evolved into a narrower, simplified value proposition: digital wealth storage.

Next, Ethereum realized the vision of a programmable smart contract platform and decentralized applications. Over time, various iterations of Ethereum's monetary policy have again converged the value proposition of ETH as an asset back to its use as a currency.

As we continue to create more layers of infrastructure, the vast majority of which are virtual products whose valuations cannot be proven by any fee-generating metrics, time and again, valuations are once again tied to the possibility of whether these tokens can become currency in the local economy of hollow block space.

Despite their respective different value propositions and the narratives we collectively craft around each asset, the fact is that while Bitcoin, Ethereum, and your favorite infrastructure layers exhibit some narrow characteristics of currency, the lifeblood of trading within the crypto capital markets is conducted in digital dollars.

All data related to trading volume associated with cryptocurrencies, whether on-chain or on centralized exchanges, confirms this reality: stablecoins and dollar-pegged assets are the true digital currencies, while everything else competes for a weaker position as digital wealth storage.

Rather than viewing the world through the lens of our biases about how we want it to exist, perhaps a better approach is to view it based on the world that actually exists.

Perhaps the greatest irony is that the most significant practical application of cryptocurrency, which intends to disrupt the existing monetary power structures, is the storage, transfer, and value transfer of digital dollars.

Like it or not, whether it aligns with your idealized vision of cryptocurrency, digital dollars are indeed being used as currency.

However, we have yet to find a native currency that is decoupled from the traditional system and independent for ourselves.

So, why is Ethena important?

If you believe:

● The monetary use case is the holy grail

● The addressable market for currency is the largest in cryptocurrency

● The killer application of cryptocurrency is our own form of native currency

Then, creating our own form of currency, even if it is not the most important, is one of the most important tasks, and it is only natural.

You may disagree, and that’s okay.

It is likely that we will not succeed, and that’s okay too.

But we do believe it is important, and that is why we are here.

What excites us? The integration of DeFi, CeFi, and TradFi

In 2014, Tether permanently changed the history of CeFi.

In 2017, MakerDAO permanently changed the landscape of DeFi.

In 2024, we believe Ethena will reshape and drive the integration of DeFi, CeFi, and TradFi:

1. DeFi

2. CeFi

3. TradFi

With USDe as the connecting link among them.

1. DeFi: Internet Bond Collateral

The first time I met Kain from Synthetix was after Ethena completed its seed round financing. Unfortunately, Kain missed the pitch deck in his inbox. He sat down to outline all the ways he wanted to help me; about the directions the product might evolve, how it fits into other parts of DeFi, which other builders I should talk to iterate on the idea, and what introducing a new scalable dollar-denominated asset on-chain might mean at scale.

At the end of breakfast, I asked him why he wanted to help Ethena with zero economic exposure. He replied, "I think this could be one of the most important new developments in DeFi, and I just want to see DeFi win."

How does DeFi win?

The dollar is the lifeblood of every major primitive in DeFi, and producing dollars is the best business model in cryptocurrency. That’s why you can almost see every major DeFi application expanding into the vertical of dollar issuance.

If we examine each core primitive in DeFi and where Ethena fits in:

sUSDe as collateral for money markets

Before the listing of Ethena, the only meaningful use case for money markets was directional leverage on WBTC or ETH, or leveraging the yield generated from staking on stETH. Introducing a new scalable dollar-denominated asset with structurally higher market yields, which is also completely exogenous to DeFi, provides a new use case for money markets and offers cheap dollar borrowing leverage for cash arbitrage trades in CeFi. The opportunity to fund borrowing in DeFi to the perpetual markets in CeFi is a multi-billion dollar opportunity that will force interest rates between these two markets to converge. We have already seen every major money market in DeFi quickly take steps to recognize this, including Aave, Curve, Maker (via Spark), Ajna, and Morpho, where USDe has become the fastest-growing dollar collateral asset.

sUSDe as margin collateral in perpetual DEXs

The hedging volume related to Ethena alone accounts for more than double the total open interest across all perpetual DEXs. The liquidity associated with USDe hedging will easily double the scale of any DEX market that Ethena protocol chooses to deploy. More interestingly, every DEX uses dollars as collateral. By combining USDe as margin collateral with the yield embedded through sUSDe, capital efficiency and returns can be significantly enhanced, and the basis on CEX platforms can be used to offset trading fees on DEXs. Ethena can provide valuable one-sided non-toxic liquidity for these platforms while embedding USDe as collateral. Deeper liquidity, higher open interest, and reduced funding costs will help initiate a healthy growth positive feedback loop and expand the addressable market of perpetual DEXs by an order of magnitude.

sUSDe as backend infrastructure for stablecoin issuers

Since the launch of Ethena USDe, it has become the fastest-growing dollar-denominated asset in cryptocurrency history. Producing dollar-denominated assets with structurally higher economic returns is one of the strongest moats for any product in cryptocurrency. There are three viable sources of potential revenue for stablecoin issuers, scaling into the billions, for their collateral backing:

i) RWA yields

ii) Over-collateralization of BTC and ETH

iii) Perpetual funding fees in perpetual futures and basis

Unlike issuers like MakerDAO and Frax that provide competitive products, Ethena serves as neutral infrastructure behind these protocols, allowing them to choose their own backing to combine with USDe. This provides these protocols with a source of returns on a scale previously unavailable—both protocols have announced allocations of up to $1.25 billion to USDe. As other stablecoin issuers grow and multiply in DeFi, Ethena will scale alongside them.

sUSDe as the underlying asset for interest rate swaps

This year, Pendle's growth has unlocked a new primitive for interest rate swap products within DeFi. So far, most of this volume has been concentrated on speculative points for pre-token projects, but once Ethena is accepted, this will unlock the first scalable yield-bearing dollar tool to construct interest rate curves. The development of interest rate swap products is still in a very early stage, but sUSDe provides the underlying asset to unlock the largest actual yields in cryptocurrency: staking ETH and the basis of centralized futures markets. The basis of the futures market represents the largest actual yield in cryptocurrency. Therefore, USDe will be the core primitive for constructing these interest rate markets.

USDe as currency in AMM DEXs

On any given day, three of the top four assets by on-chain trading volume are dollar-denominated. Similarly, digital dollars are objectively the most important assets in both on-chain and off-chain spot markets. As USDe becomes one of the most liquid assets on-chain, it will continue to circulate as the currency in trading pairs of spot assets on DEXs.

In short, every important DeFi primitive is dollar-backed. We believe USDe is an ideal cryptocurrency dollar construct that can provide foundational layer assets for other financial applications. In its brief existence, USDe has already become one of the most widely integrated assets in DeFi.

2. Tether's Privilege: Currency in CeFi

Tether is not only one of the greatest enterprises in cryptocurrency. It is also one of the best enterprises in any context ever.

What is their strongest moat?

USDT is effectively the currency on centralized exchanges. The most liquid BTC and ETH trading pairs on the largest exchanges are USDT. Importantly, the most traded tool in cryptocurrency, perpetual swaps, are primarily leveraged and settled in USDT.

Centralized exchanges are also the only viable scale distribution channels. I don’t believe we have more than 1,000,000 real users actively participating on-chain, while the largest exchanges hold keys for over 100,000,000 users.

The major success stories of every stablecoin are closely tied to distribution through exchanges. However, these relationships are often strained by the political and competitive economic dynamics between issuers and distributors.

Although Ethena and USDe initially started on DeFi chains, the larger opportunity lies in providing neutral dollar infrastructure across every major centralized exchange to serve as currency.

As Arthur outlined in his article, it is important that Ethena is not owned or built by a single centralized exchange. Ethena needs to be widely owned as neutral infrastructure in the space, and by doing so, it can help power all these venues with USDe, rather than just serving one venue alone.

Embedding USDe as the currency for spot trading pairs, along with the integration with Ethena, unlocks the profitable collateral for the $20 billion of perpetual contracts currently dollar-collateralized and represents one of the largest growth opportunities in dollar-based "yield" products.

3. The Ultimate Boss: Dollar Yields in TradFi

The fixed income market is the largest liquidity investment category in the world, exceeding $130 trillion. Most sovereign wealth, pension funds, and insurance pools are located in fixed income products. The most important financial tools for preserving and protecting wealth in the world are simply yield-bearing dollars. It sounds simple, but the demand for such products is several orders of magnitude larger than the entire cryptocurrency market.

What is unique about the yields generated by Ethena is:

i) It combines two billion-dollar scale native actual yields from cryptocurrency

ii) Yield performance shows a weak negative correlation with exchange rates in traditional finance

iii) The underlying support is held in custodians that can be insured by traditional finance

Packaging scalable native yield sources from cryptocurrency into dollar-like products provides these allocators with a simple way to access and utilize the excess yields of cryptocurrency within a single asset. When viewed within their existing fixed income portfolios, last year dollar-denominated dollars generated >20% of unfinanced profits, which is unprecedented.

Most interestingly, when actual exchange rates eventually decline, speculative activity in cryptocurrency increases, accompanied by long-term demand for leverage, which will increase the yields generated by Ethena. As the benchmark interest rates for RWA decline, Ethena becomes more interesting from a risk-adjusted perspective to offset the decline in actual rates on traditional fixed income products.

This characteristic is one of the most important reasons why billion-dollar TradFi entities invest in the Ethena ecosystem.

RWA will never be a category that can bring meaningful new capital to cryptocurrency.

Why would TradFi put dollars into on-chain tokenized treasuries, facing shell entities in the Cayman Islands, along with additional fees, operational risks, smart contract risks, and regulatory risks, rather than accessing them directly?

However, higher risk-adjusted dollar yields generated from native cryptocurrency sources are a product that will bring billions of dollars from the old system into the internet system.

Although the core product is synthetic dollars, Ethena can also be viewed as an interest rate arbitrage tool that facilitates the convergence of different rates between DeFi, CeFi, and TradFi, with USDe simply being the balancing factor that unifies them.

Beyond USDe: Ethena's Ultimate Goal

What does it take to create a $10 billion business or protocol in the crypto space?

First, you need to be a dominant player, and you have three categories to choose from:

i) Currency: BTC and ETH

ii) Network: ETH and SOL (2021 valuations)

iii) Exchange: Binance and Coinbase (2021 valuations)

Ethena's ultimate goal spans across these three categories.

i) Currency: USDe

The summary above outlines why we believe USDe is our best opportunity to create our own currency. This has always been Ethena's ultimate guiding vision.

Currently, two additional initiatives are underway that will build upon and support the growth of USDe.

ii) Network: Unified Currency Layer

Once you create a currency, you now have the most powerful product in cryptocurrency, as well as a killer application.

The natural extension of this core product is to build an economy and network on top of it.

Most foundational layer infrastructures start from the platform and then try to attract applications and their users.

We believe this order is not optimized enough.

Why?

Ethena starts with the killer product of currency. This core product provides the lifeblood assets for other financial applications, many of which are already integrated with USDe and benefit from its existence.

With USDe as the pivot asset, these applications can integrate and combine within a foundational layer optimized for currency and financial use cases. As we have outlined, we believe native yield dollars are the single most important asset for other financial applications to build upon.

For users, digital dollars are also the only product that every participant in the crypto world uses daily, and it is the only product that cryptocurrency offers to the rest of the world with indisputable product-market fit.

In less than three months, Ethena has already attracted enough dollar-denominated TVL to rank sixth in any existing chain, many of which have been around for years.

How do we get a billion users on-chain?

Well, the target addressable market for programmable dollars is the entire world.

When you make this dollar more useful, more composable, and with the best risk-adjusted returns, the world will eventually realize it.

Ethena starts with the killer product of currency and will then build a new internet economy and financial system on top of it.

iii) Trading: Liquidity Aggregation Layer

Ethena has a unique position in the crypto capital markets.

While USDe has already had a significant impact on DeFi in major applications, we have yet to see the liquidity Ethena is positioned to unlock for existing and new exchanges.

What is not widely understood at this point is how Ethena will ultimately transform into one of the liquidity pools just like other CEXs and DEXs.

Specifically, the existing support behind USDe and related hedging flows can achieve:

i) A liquidity aggregation layer, located alongside our existing centralized and decentralized exchange partners, to support deeper liquidity on their venues

ii) Guiding new incubated decentralized exchanges on the Ethena network

Just as USDe is positioned as neutral infrastructure across DeFi and CeFi platforms, the support behind USDe can also be conceptualized as a large inventory pool of spot collateral and perpetual bonds that can support other exchange venues through an aggregated exchange liquidity layer.

At any time, Ethena knows where it wants to buy or sell spot, and where to buy or sell perpetuals. This can be aggregated across all major exchanges, where Ethena's balance sheet will provide one of the deepest order books and OTC pools across the entire spot and derivatives space, while Ethena itself is the largest counterparty for external buyers.

Having the ability to support the launch of new decentralized exchanges on the Ethena network will also enable Ethena to immediately address the cold start problem of building new decentralized exchanges on foundational layer networks.

The liquidity cold start problem is one of the most challenging barriers for decentralized exchanges to begin meaningful competition.

Liquidity is one of the rare distinguishing qualities of any exchange and currently the only true moat for existing exchanges. In less than three months, Ethena is now the largest counterparty in centralized exchanges, twice the size of the entire DEX space combined.

Traffic associated with Ethena is already the most significant in the space, and at this scale, it will be the decisive factor behind which venues thrive and which ones perish.

Ethena's unique positioning is to provide solutions to support the growth of new venues on its network.

Just as USDe benefits from being neutral infrastructure in DeFi and CeFi, rather than competing directly, the Ethena trading layer will sit in a similar position to USDe:

i) Supporting existing partner venues and establishing an aggregation layer between them

ii) Supporting the growth of new venues on the Ethena network. The larger USDe grows, the lower the dollar capital cost of cryptocurrency becomes. The larger Ethena scales, the deeper and more liquid all venues become.

This is how we win together, the syllogism:

● Currency

● Network

● Trading