Author: Empire
Translated by: Plain Language Blockchain
Recently, Ethena (ENA)'s USDe stablecoin has exploded in popularity, with its market capitalization soaring from $140 million to $7.2 billion in just one year, a more than 50-fold increase. Following the passage of the GENIUS Act, Ethena Labs quickly partnered with Anchorage Digital, a US federal crypto bank, to launch USDtb, the first GENIUS-compliant, federally regulated stablecoin, bringing a compliant stablecoin to US retail investors. Simultaneously, they launched StableCoinX, raising $360 million with plans to list on the Nasdaq and launching a $260 million buyback program, sparking market enthusiasm.
Recently, Ethena founder Guy Young spoke with Hive Mind host Jose Madu, revealing the reasons behind Ethena's rapid rise in the stablecoin market and his perspective on the current market landscape.
The following is an excerpt from the podcast:
Q1: Guy, you made a major announcement this week about the USDe asset, entering the Treasury bond market. Can you share some background on this and why it's significant?
Guy Young: Absolutely. We started working on this project earlier this year, in December or January. Back then, the market wasn't as hot as it is now, where similar projects are popping up almost daily. Seeing Circle's performance in the public markets, we realized that demand for this type of theme far outstripped supply in traditional markets, and there was a lot of capital looking to invest in it, which presented an interesting opportunity for us.
From a macro perspective, I've been concerned about altcoin flows in the cryptocurrency market for the past 18 months. The peak altcoin market capitalization in 2021 and 2024 was almost identical, just under $1.2 trillion. This is a strong signal to me that there's a limited amount of global capital willing to invest in these 99% bubble tokens. The industry needs to mature. To surpass a $1.2 trillion market cap, it must attract equity investors who handle large amounts of capital.
Our focus isn't on short-term trading of assets at high premiums, but on opening up a broader investor base. Even offering token access at 1x net asset value is better than completely denying access to these markets. This is an interesting match: traditional markets are in high demand for these themes, while the crypto market faces liquidity challenges, which our solution addresses.
Q2: We're excited about the USDe asset. When will trading begin? How much capital has been 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 elaborate on this?
Guy Young: The total project size is approximately $360 million, of which $260 million is cash. Our cash ratio is significantly higher than other similar projects, as many are simply exit liquidity vehicles, with investors investing in tokens hoping to sell on the open market. Our goal is to bring in new cash and address liquidity issues. Ethena's raised funds represent approximately 8% of the circulating market capitalization, which will be used to purchase tokens on the public market. Hype, the second-largest project, raised less than 2%. This is quite significant in the market. Our project is large relative to the size of its underlying assets, and the cash raised will have a significant impact on the token. For example, $500 million would have a minimal impact on Ethereum, but a significant impact on our token. Q3: Stablecoins are experiencing strong demand for pure equity exposure, and the regulatory environment is becoming increasingly friendly, as exemplified by the passage of the Genius Act and the market's enthusiastic response to Circle. Can you discuss the challenges Circle faces, such as the impact of falling Treasury bond rates on your business? Guy Young: Thank you for your question. I will explain Ethena's appeal, USDe's operating mechanisms, and its competitive advantages for public market investors and institutional audiences. Stablecoins have diverse use cases, such as serving as collateral for trading on centralized exchanges or providing dollar payment and remittance channels in developing countries. In the future, each issuer will focus on a specific market segment rather than trying to be a one-size-fits-all solution.
Ethena's strategy is clear: we focus on use cases where we are 10x better than other players. As a startup competing against multi-billion dollar giants, we don't believe we can win across the board. Instead, we're choosing to focus on savings use cases.
A structurally higher-return USD asset is a better savings tool than one with no return. This advantage also extends to other use cases, such as using it as collateral for perpetual swaps or embedding it into DeFi applications to create new products. This is Ethena's niche market and where we're driving growth.
In 2024, USDe's average annualized yield reached 18%, four times Circle's interest income. Adjusted for returns, Ethena's assets are equivalent to $28 billion, comparable to Circle's. This means we can rival the giants in revenue without the need for a massive balance sheet.
As for competitors, we view Tether as a partner, not a rival. Many people don't realize that Ethena actually supports Tether holders worldwide. In centralized finance (CeFi), 70% of the perpetual swap market is denominated in Tether. Every $1 of collateral flowing into Ethena translates into approximately 70 cents of Tether supply growth. Tether doesn't provide a yield, as its yield is indirectly paid by the market through futures and basis trading.
Ethena productizes Tether's basis capture use case in CeFi, creating a new product. You could say Ethena is a "yield version" of Tether, with the majority of our collateral held being Tether itself, which significantly drives Tether's growth.
Q4: For those of you who may not be familiar with Ethena, could you briefly explain how you generate yield?
Guy Young: Our core strategy is cash arbitrage or basis trading: going long spot and short futures or perpetual swaps. Cryptocurrency markets have funding rates, which can be simply understood as the cost of capital for long positions. These markets rise over time, and investors are willing to pay for leveraged long positions. Ethena profits by capturing this speculative premium in derivatives markets. By analogy, all USD assets or stablecoins are a form of lending. Buying Circle's USDC is equivalent to lending money to the US government in exchange for an IOU; buying Sky's USD assets is overcollateralizing Ethereum in DeFi; and USDe provides funding for long positions in CeFi. Different lending objects determine different returns. Q5: During the 2021 cycle, some major currencies traded at spreads as high as 50-60% for several months. However, with increased liquidity in the futures market and the entry of professional fund managers and ETFs, basis spreads have compressed significantly. What dynamics are you experiencing internally? With the launch of long-tail assets like the Solana ETF and more opportunities for professional fund managers, how do you think this will develop?
Guy Young: The capital pool for ETF and CME (Chicago Mercantile Exchange) basis trading is distinct from the capital pool in the cryptocurrency market. Institutions like Millennium, which require AA-rated custodians, cannot invest in the cryptocurrency market. Consequently, traditional finance (TradFi) trades heavily on the CME, where credit risk is virtually zero, but lacks access to the cryptocurrency market. This results in a significant divergence between the CME's basis and the cryptocurrency market's, reflecting some of the exchange's credit risk.
Data from 2024 shows that the CME's cash-adjusted basis is approximately 6.5%, 150 basis points higher than Treasury yields, while Ethena's USDe yield is 18%, a gap of 1,000 basis points. While the CME supports these trades, it's more efficient to trade through Ethena.
Many hedge funds invest in Ethena because not all USDe is collateralized (sUSDe). When USDe is used as currency in an AMM (Automated Market Maker) or order book, the collateralization ratio never reaches 100%, so Ethena's yield is consistently higher than capturing the basis itself. While the basis may compress over time, we expect institutional capital to flow through Ethena because it's a more efficient channel. This is part of our investment rationale. Some have criticized the decline in basis from 60% at launch, but this is a natural phenomenon. Ethena is growing by lowering the cost of capital in the cryptocurrency market to reasonable rates in traditional finance (e.g., 10-12%), rather than 20-30%. Q6: People often focus on the high funding rates of certain coins, but Ethena has lowered these rates, which may mask the size of long positions or the degree of speculation. What are your thoughts on this? Guy Young: Indeed. The market is more overheated than before Ethena, especially in BTC and ETH. A good way to look at this is by monitoring Hyperliquid's funding rates. Currently, Hyperliquid's funding rate is approximately 25%, while Binance's is 11%. This is due to two reasons: first, Hyperliquid has a more natural retail capital flow, while centralized exchanges have more institutional investors; second, Hyperliquid lacks portfolio margin, meaning it's impossible to fully collateralize a $100 perpetual contract with $100 in BTC.
Therefore, its funding rate needs to be adjusted to be comparable to CeFi. Ethena isn't yet operational on Hyperliquid, so Hyperliquid reflects real retail capital flows unaffected by institutional capital and Ethena, making it an ideal reference point for gauging true market enthusiasm.
Q7: The cryptocurrency space recently witnessed a long-awaited event—the passage of the Genius Act, the first federal law specifically targeting stablecoins. You announced your partnership with Anchorage, which appears to make you the first stablecoin to comply with the Genius Act. Can you discuss the Genius Act, your perspective on it, the details of this partnership, and its significance for Ethena? Guy Young: We are transitioning our issuance structure from an offshore BVI entity to direct issuance of USDtb by Anchorage. Anchorage is the only federally regulated bank in the US handling cryptocurrency, and they will be launching a suite of products, similar to a "Genius service" for various issuers, to meet compliance requirements. Our strategy is a dual-track approach: through our partnership with Anchorage, USDtb will be Genius Act-compliant and usable anywhere in the US where payment stablecoins are permitted; while USDe will primarily exist in the offshore DeFi market, outside the regulated US financial system. Both markets are important, but we're excited about entering the US market because the primary use case for stablecoins is actually outside the US. Americans already have access to instant digital cash through apps like Venmo, albeit in a different form. The US market is also more competitive due to the coexistence of money market funds and stablecoins, which limits revenue potential. While we're excited about entering the US market, the offshore market remains the most dynamic operating venue. Tether's success demonstrates this, as they've focused on the offshore market from the beginning.
Q8: I'm curious. The stablecoin market is so hot right now, and everyone's talking about it. Every major company seems to have their own stablecoin strategy, and there are a lot of infrastructure startups, like Tether Chain and others, building things. What are your thoughts on this? You should have deep market insights. What's the most interesting thing about the stablecoin market right now? Which ones are overvalued? Which ones are undervalued?
Guy Young: I'm quite pessimistic about new issuers entering the market and competing with the incumbent giants. The market is excited about this topic, but it's difficult to find a breakthrough. Stablecoin products are highly commoditized, and it's difficult for startups to differentiate themselves from the incumbents.
Stablecoins need to meet three conditions: they must be denominated in US dollars, otherwise they'll be out of the game the next day; in terms of liquidity, you can't reach Tether's $100 billion in daily trading volume on day one; and third, returns. If stablecoins are backed by government bonds, profit margins become a race to the bottom. Circle has already started this race, sharing revenue with companies like Coinbase. I have a negative view on the unit economics and business models of stablecoin issuers. Tether is an exception; they established an unchallengeable position at a unique moment in time. No one can replicate their success at that particular moment. I am pessimistic about new issuers claiming to share 90% of profits; it's a difficult path. To make a business model work, you need $100 billion in scale to become an attractive investment if you only earn 5 to 10 basis points in profit. Therefore, I am most pessimistic about this part of the market, even though we ourselves are issuers of both US dollars and stablecoins. We discussed stablecoins earlier. If $3.5 trillion becomes liquid in stablecoins, especially in crypto, some of this money could flow into Bitcoin, which is very exciting. Crypto has performed well recently, with the ETH to BTC ratio back above 0.03, outperforming BTC. Solana is also performing well. What are your thoughts? Will the market continue to rise? Where are we in the cycle? Guy Young: In the long term, I remain extremely bearish on ETH and other Layer 1 (L1) assets, believing them to be the most overvalued financial assets in history. In the short term, ETH's narrative has changed. It's no longer competing with Solana for on-chain activity, but is now positioned as a tool to attract traditional financial capital, competing with BTC. As long as these instruments trade at 2.5 to 4 times net asset value (NAV), the market won't fall. However, if the premium slips from 1.5 to 1, it could signal the end of the cycle. When new instruments stop launching, premiums could collapse, as existing instruments require equity market buying. Without sufficient buying, the market could collapse. New capital is still flowing in, and market enthusiasm is high. For example, Saylor just increased its offering size from $500 million to $2 billion, and instruments are still trading at high premiums, and this trend is likely to continue. But be wary of signs of a slowdown in new tools, as that could be a market turning point.
I won't comment on my own projects, but examples like Hyperliquid have already broken away from reliance on ETH or L1 and are growing through cash flow, like true equity-like assets. Altcoins need to mature, moving beyond being just L1 betas to developing independent revenue and users. In the future, five to ten projects like Hyperliquid may be priced based on equity investment logic, decoupled from L1. I believe BTC's dominance should reach 90%, and other L1 valuations should drop to one-tenth of their current levels. A few equity-like businesses will emerge, similar to the performance of Coinbase and Robinhood this year.
Q10: Regarding Ethena, USDe has reached $6.8 billion. How much scale do you think the market can support? If everyone knows about Ethena's returns, how much can the perpetual futures market support?
Guy Young: The market potential is enormous. Current open interest is approximately $110 billion to $120 billion, yielding a 15-20% yield. 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, and I believe it should reach 20-25%, or $20 billion to $30 billion, assuming no significant market growth.
When funding rates reached 30% in December of last year, Ethena's scale had already reached $28.8 billion. If it were connected to traditional financial institutions, its scale could be even greater, with interest rates compressed to 10-12%. However, if L1 valuations decline, products that rely on L1, like Hyperliquid and Ethena, will also be affected. A few projects, like Pump, generate revenue through new token issuance and don't rely solely on L1 valuations.
