Why Ethena is the best choice for providing synthetic dollars in the on-chain encryption ecosystem?

As the pace of winter giving way to spring accelerates, I would like to revisit my article "Dust on the Crust" published a year ago. In this article, I proposed how to create a fiat stablecoin that exists without relying on traditional banking systems and is backed by human support. My idea is to combine the hedging of long and short positions in perpetual futures contracts of cryptocurrencies to create a synthetic fiat currency unit. I named it "Nakadollar" because I envisioned using Bitcoin and XBTUSD's "perpetual" short futures contracts as a way to create a synthetic dollar. At the end of the article, I pledged to do my best to support a credible team to put this idea into practice.

The changes over the year have been significant. Guy is the founder of Ethena. Before creating Ethena, Guy worked at a hedge fund with a market value of $60 billion, investing in special areas such as credit, private equity, and real estate. Guy discovered the problems with cryptocurrency during the DeFi Summer that started in 2020, and things have been out of control since then. After reading the book "Dust on Crust," he came up with the idea of launching his own synthetic dollar. But like all great entrepreneurs, he wanted to improve upon my original idea. He aimed to create a synthetic dollar stablecoin using ETH instead of BTC. At least, that was the plan at the beginning.

The reason Guy chose ETH is that the Ethereum network offers native yields. To provide security and process transactions, Ethereum network validators directly pay a small amount of ETH for each block through the protocol. This is what I refer to as ETH staking yield. Moreover, since ETH is now a deflationary currency, there is a fundamental reason for the continuous premium of ETH/USD forwards, futures, and perpetual swaps compared to spot. Short perpetual swap holders can capture this premium. By combining physical ETH staking with short positions in ETH/USD perpetual swaps, a high-yield synthetic dollar can be created. As of this week, the annual yield of spot ETH dollar (sUSDe) is approximately >50%.

Without an executable team, even the best ideas are mere talk. Guy named his synthetic dollar "Ethena" and has assembled a star team to launch the protocol quickly and securely. In May 2023, I became a founding advisor, and in exchange, we received governance tokens. In the past, I have worked with many high-quality teams, and the staff at Ethena do not take shortcuts and excel at completing tasks. Fast forward 12 months, the Ethena stablecoin USDe is officially launched, and just 3 weeks after going live on the mainnet, the issuance has approached 1 billion pieces ( with a TVL of 1 billion dollars; 1 USDe = 1 dollar ).

Let me put aside the knee pads and honestly discuss the future of Ethena and stablecoins. I believe Ethena will surpass Tether to become the largest stablecoin. This prophecy will take many years to realize. However, I would like to explain why Tether is both the best and worst business in cryptocurrency. It is said to be the best because it may be the financial intermediary that provides the most profit to every employee in traditional finance and cryptocurrency. It is said to be the worst because Tether exists to please its poorer traditional financial banking partners. The jealousy of banks and the issues Tether brings to the guardians of America's peaceful financial system could potentially lead to Tether's downfall.

To all the misguided Tether critics, I want to clarify. Tether is not a financial fraud, nor has it lied about its reserves. Furthermore, I have great respect for those who founded and operate Tether. However, in my opinion, Ethena will disrupt Tether.

This article will be divided into two parts. First, I will explain why the Federal Reserve (, the U.S. Department of the Treasury, and large U.S. banks associated with politics want to destroy Tether. Second, I will delve into Ethena. I will briefly introduce how Ethena is built, how it maintains its peg to the U.S. dollar, and its risk factors. Finally, I will provide a valuation model for Ethena's governance token.

After reading this article, you will understand why I believe Ethena is the best choice for providing synthetic dollars in the cryptocurrency ecosystem on-chain.

Note: Physically backed fiat stablecoins refer to coins issued by issuers who hold fiat currency in bank accounts, such as Tether, Circle, First Digital, etc. Synthetic backed fiat stablecoins refer to coins where the issuer holds cryptocurrencies hedged against short-term derivatives, such as Ethena.

Envy, jealousy, hatred

Tether) code: USDT( is the largest stablecoin calculated by token circulation. 1 USDT = 1 dollar. USDT is sent between wallets on various public blockchains such as Ethereum. To maintain the peg, Tether holds 1 dollar in a bank account for each circulating unit of USDT.

If there is no US dollar bank account, Tether cannot fulfill its functions of creating USDT, holding US dollars that support USDT, and redeeming USDT.

Create: Without a bank account, USDT cannot be created, as traders have no place to send their dollars.

Dollar Custody: If you do not have a bank account, there is nowhere to store the USDT-supported dollars.

Redeeming USDT: Without a bank account, you cannot redeem USDT, as there is no bank account to send dollars to the redeemer.

Having a bank account is not enough to ensure success, as not all banks are equal. There are thousands of banks worldwide that can accept dollar deposits, but only certain banks hold master accounts at the Federal Reserve. Any bank wishing to settle dollars through the Federal Reserve to fulfill its dollar correspondent obligations must hold a master account. The Federal Reserve has complete authority over which banks can obtain a master account.

I will briefly explain how correspondent banking works.

There are three banks: Bank A and Bank B have their headquarters in two non-U.S. jurisdictions. Bank C is a U.S. bank that has a master account. Banks A and B wish to transfer U.S. dollars within the fiat financial system. They each apply to use Bank C as their correspondent bank. Bank C assesses the client bases of both banks and grants approval.

Bank A needs to remit 1000 dollars to Bank B. The funds flow is 1000 dollars from Bank A's account at Bank C to Bank B's account at Bank C.

Let's make a slight change to the example by adding Bank D, which is also a U.S. bank with a master account. Bank A will use Bank C as the correspondent bank, while Bank B will use Bank D as the correspondent bank. Now, if Bank A wants to remit $1000 to Bank B, what will happen? The flow of funds is Bank C transferring $1000 from its account at the Federal Reserve to Bank D's account at the Federal Reserve. Finally, Bank D will deposit the $1000 into Bank B's account.

Typically, banks outside the United States use correspondent banks to wire transfer US dollars globally. This is because when US dollars flow between different jurisdictions, they must be settled directly through the Federal Reserve.

I started getting involved in cryptocurrency in 2013. Generally, the banks that hold fiat currency for cryptocurrency exchanges are not registered in the United States, which means they need to rely on a U.S. bank with a master account to handle fiat deposits and withdrawals. These smaller non-U.S. banks are eager for deposits and banking business from cryptocurrency companies because they can charge high fees without paying any interest on deposits. Globally, banks are usually keen to acquire cheap dollar funding, as the dollar is the world's reserve currency. However, these smaller foreign banks must interact with their correspondent banks to handle dollar deposits and withdrawals outside of their location. While correspondent banks tolerate these fiat flows related to cryptocurrency businesses, for whatever reason, sometimes certain cryptocurrency customers are asked to be removed from small banks at the behest of the correspondent banks. If the small banks do not comply with regulations, they will lose their correspondent relationships and their ability to transfer dollars internationally. Banks that lose dollar liquidity are like walking dead. Therefore, if the correspondent banks require it, small banks will always abandon cryptocurrency customers.

When we analyze the strength of Tether's banking partners, the development of this agency banking business is crucial.

Tether's banking partners:

• Britannia Bank & Trust
• Cantor Fitzgerald
• Capital Union
• Ansbacher
• Deltec Bank and Trust

Among the five listed banks, only Cantor Fitzgerald is a bank registered in the United States. However, none of these five banks have a Federal Reserve master account. Cantor Fitzgerald is a primary dealer that helps the Federal Reserve execute open market operations, such as buying and selling bonds. The ability of Tether to transfer and hold US dollars is entirely constrained by the fickle agent banks. Considering the size of Tether's U.S. Treasury investment portfolio, I believe their partnership with Cantor is crucial for continued access to this market.

If the CEOs of these banks did not negotiate for equity in Tether in exchange for banking services, then they are fools. You will understand the reason when I later introduce the per capita income indicators of Tether's employees.

This covers the reasons why Tether's banking partners have performed poorly. Next, I would like to explain why the Federal Reserve does not like Tether's business model, and fundamentally, why this is related to how the dollar money market operates rather than to encryption.

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Full Reserve Banking

From the perspective of traditional finance, Tether is a full-reserve bank, also known as a narrow bank. A full-reserve bank only accepts deposits and does not issue loans. The only service it provides is remittances. It pays almost no interest on deposits because depositors do not face any risk. If all depositors request to withdraw their money at the same time, the bank can meet their demands immediately. Hence, it is called "full reserve." In contrast, the loans of fractional-reserve banks exceed their deposits. If all depositors demand a withdrawal from a fractional-reserve bank at the same time, the bank would fail. Fractional-reserve banks pay interest to attract deposits, but depositors face risks.

Tether is essentially a fully reserved dollar bank that provides dollar trading services driven by public chains. That's it. No loans, no interesting stuff.

The Federal Reserve does not dislike full-reserve banks because of who their customers are, but because of how these banks handle their deposits. To understand why the Federal Reserve detests the full-reserve banking model, I must discuss the mechanisms of quantitative easing ) QE ( and its impacts.

Banks failed during the 2008 financial crisis because they did not have enough reserves to cover the losses from bad mortgages. Reserves are the funds that banks keep at the Federal Reserve. The Federal Reserve monitors the size of bank reserves based on the total amount of outstanding loans. After 2008, the Federal Reserve ensured that banks would never lack reserves. The Federal Reserve achieved this by implementing QE.

QE is the process by which the Federal Reserve purchases bonds from banks and credits the reserves held by the Federal Reserve to the banks. The Federal Reserve has engaged in QE bond purchases worth trillions of dollars, leading to an expansion of bank reserve balances. Great!

Quantitative easing has not caused rampant inflation in a noticeable way like the COVID stimulus checks did, because bank reserves remain at the Federal Reserve. The COVID stimulus measures were directly given to the public for discretionary use. If banks were to lend out these reserves, the inflation rate would immediately rise post-2008, as that money would be in the hands of businesses and individuals.

The existence of fractional reserve banks is to issue loans; if banks do not issue loans, they cannot make money. Therefore, under the same conditions, fractional reserve banks are more willing to lend reserves to paying customers rather than keeping them at the Federal Reserve. The Federal Reserve faces a problem. How do they ensure that the banking system has nearly unlimited reserves while not causing inflation? The Federal Reserve chooses to "bribe" the banking industry rather than lend.

Bribing banks to request the Federal Reserve to pay interest on excess reserves in the banking system. To calculate the amount of the bribe, you can multiply the total amount of bank reserves held by the Federal Reserve by the reserve balance rate.