Yesterday Ethena Labs went live with a conventional stablecoin USDtb, primarily (90%) backed by BlackRock’s BUIDL money market fund, with the balance in other stablecoins. This is notable because Ethena Labs was the founder of the third largest stablecoin, USDe, which has a market capitalization of almost $6 billion after launching at the start of this year. The $6 billion stablecoin is based on the Ethena Protocol that uses derivatives to stabilize the price. Some class it as an algorithmic stablecoin, although Ethena prefers the term ‘synthetic dollar’. It currently offers a 27% yield, which is substantially less than it has been.
Turning to the news, for the conventional stablecoin USDtb, Ethena has a partnership with Securitize, the tokenization firm responsible for bringing BUIDL on chain.
A crypto native issuer wants a centralized stablecoin?
The new stablecoin, USDtb is notable for several reasons. The biggest question is why would Ethena Labs want to be associated with a more conventional stablecoin when USDe is a crypto-native stablecoin? The answer is probably that USDe, the synthetic dollar, will do well in a booming market, but not so much when the market inevitably turns, because of the way it works. Hence, Ethena Labs may be looking to get a foothold so it has a coin for the down times as well.
There is some irony though. In the synthetic USDe documentation, it states that “DeFi faces ongoing existential risk by relying on USDC or RWAs (real world assets) with a centralized kill-switch.” BUIDL has that too. In fact, even the synthetic USDe suffers from that, as it uses conventional custodians.
When you mention algorithmic coins, one immediately thinks of Terra, which crashed in 2022, triggering many of the crypto bankruptcies. The synthetic USDe is a lot less risky, but far from risk free.
How the synthetic stablecoin works
Users who want to mint the synthetic stablecoin can deposit ETH, wrapped ETH, Bitcoin, or Solana as well as the Tether stablecoin. The dollar equivalent in USDe is minted. When BTC is deposited, the protocol automatically enters a short perpetual future for the equivalent amount of BTC. That way, if the price of BTC drops, the fall in the token price is offset by an increase in the value of the derivative.
The reason it mainly works in boom markets is because people pay to buy perpetual futures because they’re optimistic, which means that those that want a short position, such as the Ethena Protocol, are paid. In boom years such as 2021 and 2024 the shorts can earn around 18%. During July / August this year the market started going sideways so there was less demand for long perpetuals. Given part of the USDe yield comes from getting paid for shorting, the yield dropped, leading to a fall in the market capitalization. However, since the US election, the market cap has doubled. By the way, USDe is now bigger than MakerDAO’s DAI, which were rebranded to Sky and USDS, respectively.
Most of the rest of the USDe yield comes from staking ETH.
Regarding the risks, one of them is what if one of the venues where it shorts the perpetual future fails? Or a custodian is compromised? While the futures may offset the price volatility, it assumes the markets work properly even in turbulent times. There are significant differences in opinion in the crypto community regarding the risks of USDe.
Linking the two stablecoins
USDtb also plans to be one of the reserve assets for USDe. If there were suddenly mass liquidations of USDe, that could have a knock on effect on USDtb and even BUIDL. However, looking at the current makeup of USDe reserves, only around 6.7% are in stablecoins, so the impact should not be dramatic.
Turning to the new stablecoin, its custodians include StanChart’s Zodia Custody, Nomura backed Komainu, Fireblocks, Copper and Coinbase.
Like many web3 firms, the new stablecoin uses an offshore structure, this time in the BVI. There is a special purpose company, Pallas (BVI), which acts as issuer, in order to be bankrupt remote from Ethena Labs. The sole owner is the Pallas Foundation which has a single director, Marc Piano of Horizons Global. Bear in mind that all the stablecoin’s assets are on chain, and with regulated custodians. They’ve published the Ethereum wallet address for Pallas for each custodian.
Why BUIDL?
Given Franklin Templeton is one of Ethena Labs (many) backers, one might have expected USDtb to use the Franklin Templeton FOBXX on-chain money market fund. However, the partnership between Ethena and Securitize is enlightening. This provides the infrastructure to support a fully on chain stablecoin with significant automation. Ethena Labs has also focused on Ethereum.
By contrast, Franklin Templeton was the first mainstream on chain money market fund and has launched on several blockchains. However, it only launched on Ethereum last month. From an infrastructure perspective, that may have put it at a disadvantage to BUIDL. For now. FOBXX held the top spot in tokenized treasuries until BUIDL passed it. Now BUIDL is no longer the largest.
Depending on how well USDtb performs, with BlackRock’s BUIDL as the primary backing asset, it could help BUIDL take back the top spot in tokenized treasuries.
Hashnote, a startup backed by the founders of DRW, recently overtook BUIDL with its USYC. Hashnote’s USYC has grown significantly to assets under management of $899 million, compared to BUIDL’s $544 million, despite offering a lower return. While a large proportion of BUIDL is used to back money market funds and stablecoins from Ondo, Hashnote is in the same boat. In fact 97% of Hashnote’s capitalization can be attributed to the Usual stablecoin protocol.
With today’s launch of Ripple’s RLUSD, the recent launch of the Paxos Global Dollar, and many new stablecoin protocols, there’s no shortage of action in the stablecoin space.
