Arthur Hayes's "Holy Grail" Stablecoin DeFi Project Ethena Raises $6M
According to Guy Young, the Founder and CEO of Ethena their platform aims to address the immediate need within the crypto space: DeFi endeavors to create a parallel financial system; however stablecoins, which are vital financial instruments in this sector remain completely reliant, on traditional banking infrastructure.
We strongly believe that individuals worldwide should have access, to a financial tool, a dollar based savings instrument to securely store their wealth. With our stablecoin we are bringing to life our vision of a native stablecoin that does not rely on traditional banking systems. This enables the creation of an permissionless internet bond.
A breakdown of what Ethena does:
Stablecoin: The Ethena stablecoin will be backed by derivatives holding equal amounts of staked ETH and perpetual swaps shorting Ethereum. This unique approach allows it to maintain its peg to the US dollar without depending on the infrastructure. This improvement addresses some of the limitations found in existing stablecoins which are often susceptible to manipulation and volatility.
Savings bond: The Ethena savings bond will be a token that function similarly to a US treasury bond. However it distinguishes itself by being permissionless and accessible to individuals around the world. This means that anyone, regardless of their location or financial standing will have the opportunity to invest in the Ethena savings bond.
Decentralized: Ethenas stablecoin and savings bond will be built on the Ethereum blockchain ensuring decentralization and transparency. This means that there won’t be a single point of failure and people will have control over their funds.
Accessible: Everyone around the world, regardless of their location or financial status, will have access to Ethenas stablecoin and savings bonds. This accessibility is made possible because they will be built on the Ethereum blockchain, a platform that’s source and permissionless.
This Isn’t The First Time Stablecoins Backed By Derivatives Have Been Created
You heard it right! In the past there has been attempts to create stablecoins backed by derivatives. One example is Basis Cash, which launched in 2020. Basis Cash tried to maintain its value by relying on a mix of derivatives linked to the US dollar, gold and oil. Unfortunately it failed to maintain its peg and therefore had to shut down in 2021.
Another failed attempt was IRON Finance, which was launched in 2021. IRON Finance used derivatives tied to the US dollar and Ethereum as its backing. IRON Finance was also shut down in 2021 after it even tually lost $150 million due to a hack.
The failures of Basis Cash and IRON Finance highlight the challenges in creating a stablecoin backed by derivatives that are both secure and dependable. Ethena presents an approach to leveraging derivatives for stabilizing a coin, which holds the potential, for success.
In the past there have been challenges, in understanding the complexities of derivatives. This has made it difficult for issuers to effectively manage the risks involved in using derivatives to support a stablecoin.
The trading costs associated with derivatives can be quite high. This poses a challenge for issuers who need to generate revenue to cover the expenses of maintaining the stablecoins value.
Derivatives are subject to regulations in jurisdictions. This adds another layer of difficulty for issuers as they strive to comply with the rules and regulations.
Despite these obstacles there are advantages in using derivatives as collateral for a stablecoin such as enhanced security, increased reliability and improved efficiency.
“Ethena is building the holy grail of stablecoins: a coin that is truly stable, decentralized, and capital-efficient,” said Tom Schmidt, General Partner at Dragonfly. “Stablecoins have grown massively in popularity over the past few years by providing access to USD-denominated savings and remittances for people around the world, but they’ve always been handicapped by one of these three issues. Ethena has a breakthrough design that remedies these issues while also benefiting a broad user-base. We’re thrilled to be partnering with them to bring their vision to life.”
Ethena plans to utilize the initial investment to get ready for the release of their stablecoin and bond asset in the third quarter of 2023. This includes successfully finishing the testnet phase in Q3 of this year, establishing partnerships with prominent players in the industry and conducting thorough smart contract audits to guarantee the security and efficiency of the protocol.
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