Arthur Hayes Clarifies: Ethena's Yield Mechanism Unique from Terra's Collapsed UST Stablecoin

The stablecoin initiative USDe by Ethena Labs has seen notable adoption, with its market cap surging by over 40% in the last week and by 400% in the last month, reaching $840 million. Following the setback of the Terra ecosystem’s downfall, concerns have been raised within the community about the launch of USDe.

However, Arthur Hayes is optimistic, seeing Ethena as the leading contender in the crypto space to deliver a synthetic USD based on a public blockchain.

USDe is not UST

Ethena Labs introduced its USDe synthetic dollar on the public mainnet on February 19.

The launch sparked apprehension among investors due to the Ethereum-based synthetic dollar offering a 27.6% annual percentage yield (APY), surpassing the 20% yield provided by Anchor Protocol on Terra’s UST prior to the collapse of the algorithmic stablecoin issuer in May 2022.

Hayes clarified that the method by which USDe generates yield differs entirely from that of UST.

In his latest blog post, the BitMEX founder explained that Ethena utilizes two assets to generate yield: ETH staking yield and positive perp swap funding. This combination is responsible for generating the yield of USDe, which is independent of the value of Ethena’s governance token. Therefore, USDe and UST generate yield through distinct mechanisms.

“As people come to believe that the USDe yield isn’t fugazi, USDe in circulation will grow. The next step is owning a piece of the kingdom. That is where the forthcoming Ethena governance token comes into play.”

Different Risks in UST and USDT

Hayes highlighted that Ethena carries exchange counterparty risk as it is not decentralized and does not aspire to be so. Instead, it maintains short perp swap positions on centralized derivative exchanges.

In the event that these CEXs are unable to fulfill their obligations, such as paying out profits on swap positions or returning deposited collateral, Ethena could incur capital losses. To address this risk, Ethena employs third-party custodians, which is similar to how Tether’s counterparty risk lies with TradFi banks.

While stablecoin giant Tether faces counterparty risk with TradFi banks, Ethena’s risk lies with derivative CEXs and crypto custodians. However, it’s worth noting that these CEXs are investors in Ethena and have a vested interest in maintaining security and ensuring proper payouts on derivatives.

They are highly profitable entities within the crypto industry and are motivated to sustain this profitability. As Ethena expands, the open interest in derivatives grows, increasing fee income for CEXs, thereby aligning incentives for mutual success.

On the other hand, Tether’s product plays a role in facilitating the functioning of crypto capital markets, which inherently seeks to disintermediate TradFi banks.

However, traditional banks are not supportive of crypto and view Tether as a threat to their existence, Hayes said. Consequently, their incentives are not aligned with Tether’s success, and neither are those of regulators aligned with the success of Tether.