Multicoin: Why are we investing in Ethena? Synthetic USD is undervalued.

The changes in capital and channels are pushing synthetic dollars towards a third point alongside USDC and USDT. This article is based on a piece by Multicoin Capital titled “Ethena: Synthetic Dollars Challenge Stablecoin Duopoly” and has been organized and translated by BlockTempo. (Background: The Mega Matrix project aims to establish a $2 billion “stablecoin governance token” treasury, having previously invested in the synthetic dollar protocol Ethena) (Supplementary background: Stablecoin issuer StablecoinX “establishes Ethena reserves”, financing $360 million with a daily auto-invest of $5 million, ENA surges by 13%) Today, we are pleased to announce that our liquidity fund has invested in ENA—the native token of the Ethena Protocol; Ethena is the issuer of USDe (currently the leading “synthetic dollar”). We pointed out in “The Endgame of Stablecoins” that stablecoins represent the largest addressable market in the crypto industry, with “yield” being the ultimate frontier. While we correctly judged the direction of “yield-bearing stablecoins”, we underestimated the market scale of “synthetic dollars”. We categorize stablecoins into two types: those that share yield and those that do not. The “yield-bearing” stablecoins can further be divided into: those that are fully backed 1:1 by government-supported treasury assets and those that are not: which are the “synthetic dollars”. “Synthetic dollars” are not completely backed by government-supported treasury assets; their approach is to generate yield and maintain stability by executing delta-neutral trading strategies in the financial market. Ethena is a decentralized protocol and currently the largest operator of the synthetic dollar USDe. Ethena's goal is to provide an alternative compared to traditional stablecoins like USDC and USDT; these traditional stablecoins primarily earn short-term U.S. Treasury yields from their reserves. In contrast, Ethena's USDe reserves generate yield and aim for stability through one of the largest and most verified strategies in traditional finance—basis trading. Just in the U.S. Treasury futures market, the scale of basis trading is measured in hundreds of billions, even trillions of dollars. Nowadays, the infrastructure capable of executing this strategy on a large scale is typically only available to qualified and institutional investors. Crypto is rebuilding the financial system from the ground up, opening these opportunities to everyone through tokenization. Our team has actually been thinking for years about using “basis trading” as the foundation to create a “synthetic dollar”. As early as 2021, we published a discussion and announced an investment in UXD Protocol—the world's first token fully backed by basis trading. Although UXD Protocol was “ahead of its time”, we believe that Guy Young, founder and CEO of Ethena Labs, has executed this vision exceptionally well. Today, Ethena has become the largest synthetic dollar, with a circulating supply growing to $15 billion within two years of launch, and dropping to around $8 billion after the market clean-up on October 10th. In terms of the overall “digital dollar”, it ranks third, only behind USDC and USDT. Changes in USDe circulating supply (source: DefiLlama) Systematic tailwinds for synthetic dollars Ethena sits at the intersection of three powerful trends reshaping modern finance: stablecoins, perpification, and tokenization. Stablecoins currently circulating in the market exceed $300 billion, and are expected to grow to trillions by the end of this generation. For nearly a decade, USDT and USDC have dominated the stablecoin market, together accounting for over 80% of the total supply. Both do not directly share yields with holders—but we believe that over time, “sharing yields with users” will shift from being an exception to the norm. In our view, the competition and differentiation among stablecoins lie in three dimensions: channels, liquidity, and “yields”. Tether has created excellent liquidity and global channels for USDT; it is the main quoted asset in crypto trading and the most widespread channel for obtaining “digital dollars” in emerging markets. Circle focuses on sharing economic benefits with partners like Coinbase to expand channels—this strategy, while effectively driving growth, has also compressed Circle's profit margins. As crypto penetration accelerates, we expect more companies with deep channels in finance and technology to issue their own stablecoins, further commodifying the “government-backed stablecoin” market. For newcomers, the main way to differentiate is to offer higher yields. In recent years, the narrative of “yield-bearing stablecoins” has gradually strengthened. However, those backed by U.S. Treasuries provide yields that are insufficient to achieve significant adoption within the crypto-native community—this is due to the historically high opportunity cost of crypto-native capital compared to U.S. Treasury yields. Among all newcomers, Ethena is the only one to achieve significant channels and liquidity, mainly because it offers higher yields. Based on the price changes of sUSDe since its inception, we estimate its annualized yield to be slightly above 10%, about twice that of “Treasury-backed stablecoins”. Its approach is to capitalize on basis trading—a strategy that monetizes from market “leverage demand”. To date, the protocol has accumulated nearly $600 million in revenue—of which $450 million was generated in the past 12 months. Source: Token Terminal In our view, the true test of adoption for synthetic dollars is their acceptance as “Collateral” on major exchanges. Ethena has performed excellently in this regard, with USDe becoming one of the core collateral assets on large centralized exchanges like Binance and Bybit—this is a key driver of its rapid growth. Another unique characteristic is its mild negative correlation with “The Federal Reserve (FED) rates”. Unlike Treasury-backed stablecoins, when rates decline, Ethena would theoretically benefit—because lower rates stimulate economic activity, increase leverage demand, push up funding rates, and strengthen the basis trading that supports Ethena's yields. We witnessed this scenario in 2021: the spread between funding rates and Treasury yields once widened to over 10%. Of course, as crypto and traditional finance integrate more deeply, more capital will flow into the same basis trading, narrowing the spread between “basis trading” and “The Federal Reserve (FED) rates”. However, this integration will take years to achieve. Source: Bitcoin funding rate, Treasury yield “U.S. Treasury rate vs funding rate” Finally, J.P. Morgan's research estimates that yield-bearing stablecoins could capture up to 50% of the stablecoin market share in the future. As the overall stablecoin market moves toward trillion-dollar scale, we believe Ethena is excellently positioned in this transition. Perpification Perpetual futures have shown strong “product-market fit” in the crypto space. In this approximately $4 trillion asset class, crypto perpetual contracts have a daily trading volume exceeding $100 billion…