What is Ethena Labs, and why is it gaining traction in DeFi circles? Ethena Labs quickly made its mark in the DeFi world, mostly thanks to USDe, its fresh take on a synthetic dollar, and a yield-earning tool they’ve dubbed the “Internet Bond.” Their goal is to provide a stablecoin option that’s born from crypto, can handle lots of users, and avoids censorship, all while steering clear of the usual banking systems.
USDe, central to what Ethena does, is built to stay valued at one US dollar. It keeps this value not by holding actual cash, but by using a clever hedging method known as “delta-neutral.” To do this, they back USDe with cryptocurrencies – starting with Ethereum and related assets like stETH, and then adding Bitcoin – and at the same time, they open up matching short positions on futures markets. The basic principle is that if the held crypto changes price, the short futures should move in the opposite direction, ensuring the backing’s dollar value remains steady.
What Ethena Wants to Achieve and Where It Fits in
At its heart, Ethena wants to give the DeFi space a steady, scalable type of digital money, USDe, that doesn’t need old-fashioned banks. They also dream of building a separate, decentralized money system. Part of this is the “Internet Bond” (sUSDe, or USDe that’s been staked), which they’ve set up as a savings tool anyone in the world can use, earning in dollars. This tool makes money mainly from rewards on staked Ethereum and fees earned from their delta-hedging activities. Ethena presents itself as a builder of neutral tools for both decentralized and traditional finance, hoping USDe will be widely adopted.
Who Started It and the Team’s Credentials
Guy Young is the person who founded Ethena Labs and runs it as CEO. While you don’t hear a lot about the rest of the founding group, the team is said to have solid experience in both old-school finance and crypto development, with folks coming from big names like Cerberus Capital Management, Wintermute, BitMEX, and others. Arthur Hayes, who co-founded BitMEX, acts as an important advisor; his writings, especially an article called “Dust on Crust,” are often mentioned as a spark for Ethena’s synthetic dollar idea.
Key Steps in Growth and How Funding Happened
Since starting in 2023, Ethena Labs didn’t waste time hitting key development and funding targets:
- First Money In (July 2023): They landed $6.5 million. Dragonfly Capital led this seed round, and people like Arthur Hayes, plus companies such as BitMEX, Deribit, Bybit, OKX, and Gemini, also chipped in.
- USDe’s Quiet Debut (December 2023): USDe was rolled out without much fanfare, and reportedly, it quickly attracted over $224 million in locked-up value.
- More Strategic Cash (February 2024): They gathered another $14 million. This strategic funding round was jointly led by Dragonfly and Maelstrom (Arthur Hayes’s family office), and it valued Ethena at $300 million.
- ENA Token Out, Plus Airdrop (March/April 2024): They released ENA, their own governance token. This came with an airdrop after a promotional effort that pushed USDe’s total supply to $1.35 billion. Owning ENA lets you have a say in how the protocol is run.
- Adding Bitcoin (After Airdrop 2024): Ethena started work to use Bitcoin as one of the assets backing USDe.
- Big Private Token Sale (Word is, February 2025): The Ethena Foundation supposedly brought in $100 million by selling ENA tokens privately in December 2024. Buyers reportedly included Franklin Templeton, Polychain Capital, and Pantera Capital. This cash is set aside to create a new blockchain for the Ethena network and their institutional product, iUSDe.
- Converge Blockchain (Coming Q2 2025): Ethena Labs, teaming up with Securitize, let it be known they plan to launch Converge. It’s an EVM-compatible blockchain meant to connect traditional finance with DeFi.
- TON Hook-up (May 2025): They announced a partnership with The Open Network (TON). The idea is to get USDe and sUSDe into the hands of Telegram’s huge number of users.
Taking On DeFi’s Big Hurdles
Ethena is trying to solve what’s known as the “stablecoin trilemma” – how hard it is to get decentralization, stability, and efficient use of capital all at once. Stablecoins backed by regular money (like USDC, USDT) are stable but risk being centralized and censored. Those backed by other cryptos (like DAI) are more decentralized but often don’t use capital as well. Algorithmic stablecoins have a rocky past when it comes to holding their value. USDe tries to find a path through this by offering a crypto-first, scalable synthetic dollar that resists censorship.
The protocol also heavily emphasizes generating yield from within, through its “Internet Bond,” which earns from staking rewards and derivative funding rates.
How USDe and the “Internet Bond” Actually Work
USDe stays pegged to the US dollar because of that delta-neutral hedging we talked about earlier. Certain approved players in the market can create and cash out USDe. This creates chances for arbitrage, which helps pull USDe’s price back to the peg if it drifts on outside markets. There’s also a reserve fund ready to cover potential expenses, like if funding rates on its short positions turn negative for a while.
The “Internet Bond,” or sUSDe, lets people stake their USDe. When they do, they earn a mix of yield from the staked collateral’s rewards and the money made from the funding/basis spread on the short futures. How much this yield is can change a lot depending on what the market is doing.
Money Strategies and Managing Assets
Ethena’s approach means they hold crypto assets like ETH, stETH, and BTC directly. Sometimes they also hold liquid stablecoins such as USDC and USDT as collateral. They usually keep these assets in “Off-Exchange Custody solutions” with top-tier custodians to lessen the risk of a counterparty failing. At the very same time, the protocol takes out short perpetual futures contracts for the volatile assets it holds as collateral.
They make money from the staking rewards on assets like stETH. More importantly, they earn from positive funding rates and the basis spread on those short perpetual futures. Ethena also rolled out UStb, a stablecoin backed by tokenized U.S. Treasury Bills. They see this as a strategic backup asset, especially for times when funding rates for crypto derivatives go negative.
The Tech Side: Smart Contracts and Oracles
Several smart contracts run Ethena’s operations on the blockchain, including the ones for making, destroying, and staking USDe (that’s StakedUSDeV2.sol). For managing who owns these contracts, the protocol uses Gnosis Safe multisig wallets.
Getting price information right is absolutely vital. Ethena uses an oracle system that has parts both on and off the blockchain. It pulls real-time prices from big centralized exchanges (like Binance, Bybit, OKX) and uses decentralized oracle networks such as Pyth Network and Redstone Oracles to double-check everything.
The whole setup is a mix: smart contracts on the blockchain handle token stuff and governance, while off-chain systems do the hedging, manage risks, and talk to the centralized exchanges. The upcoming Converge blockchain, which is an EVM-compatible settlement layer, is intended to make things even more scalable.
Backing and Risk Factors
USDe is set up for a 1-to-1 backing through its delta-hedging, not by holding more collateral than it’s worth, which is the traditional way. While this makes for efficient use of capital, the system definitely comes with big risks:
- Funding Rate Trouble: If funding rates stay negative for too long, it could eat into the protocol’s reserve fund and possibly put the peg under strain. Ethena’s reserve fund and the new USDtb are there to help lessen this.
- Counterparty Problems: Relying on derivative exchanges for hedging and custodians to hold assets means there’s risk if those parties run into trouble, though OES solutions are meant to cut this down.
- Liquidation and Collateral Shocks: Wild market swings or if one of the underlying collateral assets loses its value (like stETH de-pegging from ETH) could mess with the delta-neutral plan.
- Smart Contract Bugs: Flaws in the smart contracts are always a possible danger, even with audits. Ethena has had firms like Zellic, Quantstamp, and Pashov check their code. These audits apparently didn’t find critical or high-level problems in early versions, but they did point out some medium and lower-severity issues that were then fixed.
- Rule Changes: The rules for stablecoins and DeFi are still being figured out around the world, which creates a lot of unpredictability. Ethena GmbH, a German branch, ran into trouble with BaFin over licensing under MiCA rules.
- Market Swings and De-Pegging Scares: Really bad market stress could knock USDe off its peg, particularly if trading liquidity disappears. S&P Global Ratings rated USDe’s ability to hold its peg as “weak” (a 5 on their scale). They mentioned the complexity of the hedging and that reserves might not be enough if negative funding rates are severe and last a long time.
Ethena Labs has put several risk-reduction tactics in place, like the reserve fund, OES custody, and using a variety of exchange partners. They also launched a Proof of Reserves (PoR) system to try and be more open about what’s backing USDe.
The ENA Token and How Things Are Governed
The ENA token is what allows for governance of the Ethena protocol. There’s a total of 15 billion ENA tokens. They’re split up among core team members, investors, the Ethena Foundation, and for growing the ecosystem (which includes airdrops). People who hold ENA can vote on changes to the protocol and on risk settings. Ethena uses a committee system for governance, where ENA holders choose who sits on these committees.
Market Take-up and How It’s Doing
USDe caught on fast; its market value shot past $5.2 billion by late May 2025. DefiLlama showed a similar amount of total value locked for Ethena. The number of users has also jumped up a lot. USDe sees plenty of trading on centralized exchanges like Bitget and Bybit, and also on decentralized ones like Uniswap.
Important places it’s now available include BNB Chain (through PancakeSwap and Venus), the Aptos ecosystem, Hyperliquid, and Aave, where sUSDe can even be used as collateral.
People have noticed USDe for offering good, though fluctuating, annual percentage yields (APYs), which at some points have reportedly gone over 30%. But these earnings really hinge on market conditions, especially those funding rates.
Who Else Is Out There and What’s Next
Ethena is up against well-known fiat-backed stablecoins (USDT, USDC), decentralized ones (DAI), and other DeFi protocols that generate yield. Its strengths could be higher potential yields, its ability to scale, and its resistance to censorship. The downsides are mainly tied to its complicated risk picture, especially how much it depends on funding rates.
Looking ahead, their plans are centered on connecting to traditional finance with iUSDe, getting the Converge network live, and linking up with platforms like Telegram to get more users.
Ethena’s setup is different from failed algorithmic stablecoins like Terra/Luna because USDe is backed by collateral and hedged. It doesn’t rely on making money from creating new tokens or on a shaky native token to keep its peg. Still, because it depends on complex financial maneuvers and the ups and downs of the crypto market, users and the market as a whole need to weigh the risks carefully.
Heads Up: This piece is just for information. Don’t take it as financial advice. Putting money into cryptocurrencies and DeFi projects comes with a real chance of losing it.
