Author: Empire
Translation: Baihua Blockchain

Recently, Ethena (ENA)'s USDe stablecoin has gained significant attention, with its market capitalization skyrocketing from $140 million to $7.2 billion within a year, an increase of over 50 times. Following the passage of the GENIUS Act, Ethena Labs quickly partnered with the U.S. federal crypto bank Anchorage Digital to launch the first GENIUS-compliant, federally regulated stablecoin USDtb, bringing compliant stablecoins to U.S. retail investors. They also launched StableCoinX, raising $360 million, with plans to list on Nasdaq and initiate a $260 million buyback program, creating a market frenzy.

Recently, Ethena founder Guy Young was interviewed by Hive Mind host Jose Madu, revealing the reasons behind Ethena's rapid rise in the stablecoin sector and his views on the current market landscape.

Here are excerpts from the podcast:

Q1: Guy, you made a significant announcement this week regarding USDe assets, entering the treasury bond company sector. Can you share some background on this and why it is important?

Guy Young: Of course. We started preparing for this project back in December or January of this year. At that time, the market wasn't as hot as it is now, and similar projects are emerging almost daily. Seeing Circle's performance in the public market, we realized that the traditional market's demand for such themes far exceeds supply, with a lot of capital eager to invest, which presents an interesting opportunity for us.

From a macro perspective, I have been concerned about the capital flow in altcoins within the cryptocurrency space over the past 18 months. The total market cap of altcoins peaked in 2021 and 2024 at nearly the same level, just below $1.2 trillion. This is a strong signal for me, indicating that the global willingness to invest in these 99% bubble tokens is limited. The industry needs to mature; to break through the $1.2 trillion market cap, it must attract equity market investors who handle large-scale funds.

What we value is not the short-term trading of assets at high premiums, but rather opening up a broader investor base. Even providing token access at 1x net asset value is better than being completely shut out of these markets. This is an interesting match: the traditional market has strong demand for such themes, while the crypto market faces capital flow issues, and our solution can address that.

Q2: The excitement around USDe assets is palpable. When will trading begin? How much total funding has been raised? Can you share more details? Ethena Labs tweeted that this is the project with the highest cash-to-asset market value ratio; can you elaborate on that?

Guy Young: The total scale of the project is about $360 million, of which $260 million is cash. Our cash ratio is much higher than that of other similar projects because many projects are merely liquidity exit tools, where investors hope to sell tokens in the public market after investing. Our goal is to bring in new cash to solve the capital flow problem. The funds raised by Ethena account for about 8% of the circulating market value, which will be used to purchase tokens in the public market, while the second-ranked Hype accounts for less than 2%. This is very prominent in the market; relative to the underlying asset scale, our project size is substantial, and the cash raised will have a significant reflective effect on the tokens. For example, $500 million has little impact on Ethereum but has a significant impact on our tokens.

Q3: There is a strong demand for pure equity exposure in stablecoins, and the regulatory environment is becoming increasingly friendly, such as the passage of the Genius Act and the market's enthusiastic support for Circle. Can you discuss the challenges Circle faces, such as the impact of declining treasury rates on your business?

Guy Young: Thank you for the question. Let me explain Ethena's appeal to public market investors and institutional audiences, as well as the operational mechanism and competitive advantages of USDe.

The use cases for stablecoins are very diverse, such as serving as collateral for centralized exchanges or providing dollar payment and remittance channels for developing countries. In the future, each issuer will focus on specific niche markets rather than trying to be a universal solution.

Ethena's strategy is clear: we focus on use cases where we can perform ten times better than other players. As a startup competing with giants worth hundreds of billions, we do not believe we can win comprehensively but choose to focus on savings use cases.

A dollar asset with structurally higher returns is a better savings tool compared to a non-yielding asset. This advantage extends to other scenarios, such as being used as collateral for perpetual contracts or embedded in DeFi applications to create new products. This is Ethena's niche market and the area where we achieve growth.

In 2024, the average annualized yield of USDe reached 18%, four times Circle's interest income. Adjusted for yield, Ethena's asset scale is equivalent to $28 billion, comparable to Circle. This means we can compete with giants in revenue without a massive balance sheet.

As for competitors, we view Tether as a partner rather than an opponent. Many people do not realize that Ethena actually supports global Tether holders. In centralized finance (CeFi), 70% of the perpetual contract market is denominated in Tether, and the $1 collateral flowing into Ethena translates to about a 70-cent increase in Tether supply. Tether does not provide yield because its returns are indirectly paid by the market through futures and basis trading.

Ethena has productized the use case of capturing Tether's basis in CeFi, creating new products. You could say that Ethena is the "yield version" of Tether, and most of the collateral we hold is Tether itself, which significantly drives Tether's growth.

Q4: Listeners may not be very familiar with Ethena, but can you briefly introduce how you generate yield?

Guy Young: The core strategy is cash arbitrage or basis trading: going long on spot while shorting futures or perpetual contracts. There are financing rates in the cryptocurrency market, simply understood as the cost of capital for going long. These markets rise over time, and investors are willing to pay fees for leveraged long positions. Ethena profits by capturing the speculative premium in the derivatives market.

To draw a comparison, all dollar assets or stablecoins are a form of lending. Buying Circle's USDC is akin to lending money to the U.S. government in exchange for an IOU; purchasing Sky's dollar assets is borrowing in DeFi with Ethereum over-collateralized; while USDe provides financing for long positions in CeFi. The different borrowing counterparts determine the different return rates.

Q5: In the 2021 cycle, some major coins saw basis trading as high as 50-60% for several months. However, now, with increased liquidity in the futures market and the entry of professional fund managers and ETFs, the basis has significantly compressed. What dynamics have you experienced internally? With the launch of long-tail assets like Solana ETFs and more opportunities for professional fund managers, how do you see this developing?

Guy Young: The capital pools for ETF and CME (Chicago Mercantile Exchange) basis trading are entirely different from those in the cryptocurrency market. Institutions like Millennium cannot invest in the cryptocurrency market due to the need for AA-rated custodians. Therefore, traditional finance (TradFi) conducts a lot of trading on the CME, where credit risk is almost zero, but cannot touch the cryptocurrency market. This leads to significant differences between the basis on the CME and that in the cryptocurrency market, reflecting some of the credit risk of the exchanges.

Data from 2024 shows that the cash-adjusted basis on the CME is about 6.5%, which is 150 basis points higher than treasury yields, while Ethena's USDe yield reaches 18%, with a gap of up to 1000 basis points. Although the CME supports these trades, it is more efficient through Ethena.

Many hedge funds are putting capital into Ethena because USDe is not entirely used for staking (sUSDe). When USDe is used as currency in AMM (automated market maker) or order books, the staking rate does not reach 100%, so Ethena's yield is always higher than the yield from capturing the basis independently. Although the basis may compress over time, we hope institutional capital flows into Ethena because it is a more efficient channel. This is one of our investment logics. Some criticize the basis for dropping from 60% when we launched, but this is a natural phenomenon. Ethena continuously grows by lowering the capital cost in the cryptocurrency market to reasonable rates in traditional finance (like 10-12%) rather than 20-30%.

Q6: People usually focus on the high financing rates of certain coins, but Ethena has lowered these rates, which may obscure the scale or speculative nature of long positions. What are your thoughts on this?

Guy Young: That is indeed the case. The market was hotter before Ethena emerged, especially with BTC and ETH. Observing the financing rates on Hyperliquid is a good approach. Currently, Hyperliquid's financing rate is about 25%, while Binance's is 11%. There are two reasons: first, Hyperliquid's retail capital flow is more natural, while centralized exchanges have more institutional investors; second, Hyperliquid does not have portfolio margining, so you cannot fully collateralize a $100 perpetual contract short with $100 of BTC.

Therefore, its financing rate needs to be adjusted to compare with CeFi. Ethena has not yet operated on Hyperliquid, so Hyperliquid reflects the true retail capital flow that is not influenced by institutional capital and Ethena, making it an ideal reference point for assessing the market's real heat.

Q7: Recently, the cryptocurrency space has witnessed a long-awaited event—the passage of the Genius Act, the first federal law targeting stablecoins. You announced a partnership with Anchorage, which seems to make you the first stablecoin compliant with the Genius Act. Can you discuss the Genius Act, your views on it, and the details of this partnership and its significance for Ethena?

Guy Young: We are transitioning our issuance structure from an offshore BVI entity to USDtb issued directly by Anchorage. Anchorage is the only federally regulated bank in the U.S. that handles cryptocurrencies, and they will launch a suite of products similar to providing "Genius services" for different issuers to meet compliance requirements. Our strategy is dual-track: by partnering with Anchorage, USDtb will comply with the Genius Act and can be used in any scenario in the U.S. that allows payment stablecoins; while USDe primarily exists in the offshore DeFi market, outside the regulated financial system in the U.S.

Both markets are important, but our excitement about entering the U.S. market lies in the fact that the main use cases for stablecoins actually exist outside the U.S. Americans can already access instant digital cash through applications like Venmo, just in a different form. The competition in the U.S. market is also fiercer, as money market funds coexist with stablecoins, limiting income potential. While we are excited about entering the U.S. market, the offshore market remains the most vibrant operating space. Tether's success proves this, as they have focused on the offshore market from the beginning.

Q8: I am curious, the stablecoin market is currently very hot, and everyone is discussing them. It seems that every major company has its own stablecoin strategy, and there are many infrastructure startups, such as Tether chain or other things being built. What are your thoughts on this? You should have deep insights into the market. What do you find most interesting in the current stablecoin market? Which are overvalued? Which are undervalued?

Guy Young: I hold a rather pessimistic view regarding new issuers entering the market and competing with existing giants. The market is excited about this topic, but it is difficult to find a breakthrough. Stablecoin products are highly commoditized, making it hard for startups to differentiate themselves from established giants.

Stablecoins need to meet three conditions: they must be dollar-backed, or they will be out of the game the next day; in terms of liquidity, you cannot reach Tether's daily trading volume of $100 billion on the first day; and thirdly, returns.

If stablecoins are backed by treasury bonds, the profit margins will turn into a race to the bottom. Circle has already started this competition, sharing profits with companies like Coinbase. I have a negative view of the unit economics and business models of stablecoin issuers. Tether is an exception; they established an unshakeable position at a unique point in time. No one can replicate their success at that specific moment. I am pessimistic about new issuers claiming to share 90% of profits; it is a tough road. For a business model to work, if you only earn 5 to 10 basis points of profit, you need a scale of $100 billion to become an attractive investment project. Therefore, I am most pessimistic about this part of the market, even though we are also issuers of dollars and stablecoins.

Q9: Previously, we discussed stablecoins. If $3.5 trillion in funds turns into liquid stablecoins, especially flowing into the crypto market, some of that money may go into Bitcoin, which is very exciting. The crypto market has performed well recently, with the ETH/BTC ratio returning above 0.03, outperforming BTC. Solana has also performed well. What are your thoughts? Will the market continue to rise? At what stage of the cycle are we?

Guy Young: Long-term, I remain very bearish on ETH and other Layer 1 (L1) assets, considering them the most overvalued financial assets in history. In the short term, the narrative around ETH has changed; it no longer competes with Solana for on-chain activity but is positioned as a tool to attract traditional financial capital, competing with BTC.

As long as these tools trade at 2.5 to 4 times net asset value (NAV), the market will not decline. However, if the premium slides from 1.5 times to 1 time, it could signal the end of the cycle. When new tools stop being launched, the premium may collapse because existing tools need buy support from the equity market. If there is not enough buying support, the market could collapse. Currently, new capital is still flowing in, and market enthusiasm is high; for example, Saylor just increased the issuance scale from $500 million to $2 billion, and tools are still trading at high premiums, which may continue. However, we need to be alert to signs of a slowdown in new tools, as that could be a turning point for the market.

I won't comment on our own project, but examples like Hyperliquid have already detached from reliance on ETH or L1, growing through cash flow like true equity-like assets. Altcoins need to mature, no longer just being a beta of L1, but having independent revenue and users. In the future, 5 to 10 projects like Hyperliquid may be priced based on equity investment logic, decoupling from L1. I believe BTC's dominance should reach 90%, while other L1 valuations should drop to one-tenth of their current levels, with a few equity-like businesses standing out, similar to how Coinbase and Robinhood performed this year.

Q10: Regarding Ethena, the scale of USDe has reached $6.8 billion. How large do you think the market can support? If everyone knows Ethena's returns, how large can the perpetual contract futures market support?

Guy Young: The market potential is enormous. Currently, the open interest is about $110 billion to $120 billion, with yields of 15-20%. The three main cash flow sources in the crypto space are Binance equity, Tether equity, and futures market basis trading. Ethena occupies 6-10% of the derivatives market, and I believe it should reach 20-25%, which is $20 billion to $30 billion, assuming the market does not grow significantly.

When the financing rate reached 30% last December, Ethena's scale had already reached $28.8 billion. If we connect with traditional financial institutions, the scale could be even larger, with rates compressed to 10-12%. However, if L1 valuations decline, products like Hyperliquid and Ethena that rely on L1 will also be affected. A few projects like Pump are making money through new token issuance, not entirely relying on L1 valuations.

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