Tracing Ethena’s Path: From Arthur Hayes’ Vision to Today’s Reality

Arthur Hayes, the founder of BitMEX, introduced the concept of a synthetic stablecoin in his essay “Dust on Crust,” a vision that later inspired the creation of Ethena. In this paper, Hayes critiques the reliance of popular stablecoins on the Western banking system, arguing that a banking crisis in the Western world could destabilize the entire crypto ecosystem.

Hayes also examined decentralized stablecoins like MakerDAO, which aim to solve this issue but often fall short. These projects typically require over-collateralization to maintain their peg, reducing overall liquidity in the system. Additionally, many rely on centralized collateral, which undermines their claim to decentralization.

Summing up the ultimate goal of a decentralized stablecoin, Hayes stated:

“The goal is to create a token that is worth 1 USD but does not require the services of the fiat banking system.”

To achieve this, Hayes proposed a concept: a stablecoin fully backed by Bitcoin, with yield generated through perpetual contracts. The mechanism would involve backing each unit of the stablecoin with $1 spot Bitcoin holdings and $1 of a short position in BTC-margined perpetual futures contracts (perps). This structure would keep the total value at $1 regardless of Bitcoin price fluctuations. Funding rates from the perpetual contracts, often paid by long-position traders to short-position holders, would generate yield.

However, this approach faces challenges. The stablecoin would be vulnerable to prolonged periods of negative funding rates, particularly during bear markets. This has raised concerns within the crypto community about the stablecoin’s ability to endure long-term market downturns.

Despite these concerns, the Ethena project was eventually established to bring Hayes’ vision to life. A group of developers, inspired by his ideas for a decentralized stablecoin, approached Hayes, leading to the creation of Ethena. Although Hayes did not found the project himself, he has fully endorsed it, invested in its development, and serves as an advisor to the team.

However, Ethena has made compromises that deviate from Hayes’ original vision. Its current technology has some elements of Hayes’ design, yet it falls far short of his primary goal: eliminating reliance on the Western banking system.

While it introduced crypto-backed collateral, such as Bitcoin and Ethereum, the project also relies heavily on USDT, a centralized stablecoin tied to banks. Hayes had envisioned BTC-margined perps to maintain the peg, but Ethena uses USDT-margined perps due to their higher liquidity. This dependency on USDT poses significant risks, as a potential USDT depeg could negatively impact Ethena’s stablecoin, USDe.

Ethena has further integrated with the traditional financial system by introducing USDtb, a stablecoin backed by tokenized real-world assets. Ninety percent of USDtb reserves are held in BUIDL, a tokenized fund issued by BlackRock and Securitize. As it was announced recently, USDtb will be used as collateral for USDe, contradicting the original vision of a stablecoin independent of the centralized banking system.

Even if Ethena could eliminate its reliance on centralized collateral and USDT, its trading strategies still depend on centralized crypto exchanges. This creates an additional layer of risk, potentially greater than the impact of a banking crisis.

In conclusion, building a synthetic stablecoin that aligns with Hayes’ vision of decentralization and independence requires substantial progress in decentralized finance. This includes advancements in decentralized trading infrastructure and deeper integration of Bitcoin into DeFi. Until these developments materialize, the idea of a truly decentralized and resilient stablecoin remains a distant aspiration rather than a tangible reality.