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Author: Arthur Hayes, BitMEX Co-founder
As scheduled, the dust on the crust returned to Hokkaido, Japan. During the day, the sunshine was bright and warm like spring, but at night, it was bone-chillingly cold. This weather pattern caused the severe snow conditions known as "crust dust." Under the seemingly pristine snow lies ice and brittle snow. Sickening.
As the footsteps of winter to spring hasten, I want to revisit an article I published a year ago called "Dust on the Crust." In this piece, I proposed how to create a fiat-backed stablecoin that exists independently of the TradFi banking system and is supported by humans. My idea was to hedge long and short positions of cryptocurrency perpetual futures contracts to create a synthetic fiat currency unit. I named it the "Nakadollar" because I envisioned using Bitcoin and the "perpetual" short futures contracts of XBTUSD as a way to create synthetic dollars. At the end of the article, I promised to do my best to support a trustworthy team to put this idea into practice.
What a difference a year makes. Guy is the founder of Ethena. Before creating Ethena, Guy worked at a hedge fund with a market capitalization of $60 billion, investing in special areas such as credit, private equity, and real estate. Guy discovered the Shitcoin problem during the DeFi Summer of 2020 and hasn't looked back since. After reading "Dust on Crust," he conceived the idea of launching his synthetic dollar. But like all great entrepreneurs, he wanted to improve upon my original idea. He wanted to create a synthetic dollar stablecoin using ETH instead of BTC. At least initially.
Guy chose ETH because the Ethereum network provides native yields. To provide security and process transactions, Ethereum network validators are directly compensated with small amounts of ETH through the protocol for each block. This is what I call the ETH staking yield. Additionally, because ETH is now a deflationary currency, ETH/USD forward, futures, and perpetual swap trades consistently have a premium compared to spot. Short holders of perpetual swaps can capture this premium. Combining physical ETH collateral with short ETH/USD perpetual swap positions can create a high-yield synthetic dollar. As of this week, the annual yield for spot ETH/USD (sUSDe) is approximately >50%.
Without a capable team, great ideas are just talk. Guy named his synthetic dollar "Ethena" and has assembled a stellar team to launch the protocol quickly and securely. In May 2023, Maelstrom became a founding advisor, and in exchange, we obtained governance tokens. I have worked with many high-quality teams in the past, and Ethena's employees do not disappoint, efficiently completing tasks. Fast forward 12 months, and the stablecoin USDe of Ethena has officially launched. Just three weeks after the mainnet launch, the circulation has reached nearly 1 billion (TVL is $1 billion; 1USDe = $1).
Let me set aside my knee pads and discuss the future of Ethena and stablecoins candidly. I believe Ethena will surpass Tether to become the largest stablecoin. This prophecy will take many years to fulfill. However, I want to explain why Tether is both the best and worst business in cryptocurrency. I say it's the best because it might be the most profitable financial intermediary for every employee in both TradFi and crypto. I say it's the worst because Tether's existence is to appease its poorer TradFi bank partners. The jealousy of banks and the problems Tether brings to the guardians of peace in the US financial system may spell immediate doom for Tether.
For all the misled Tether FUDsters out there, let me be clear. Tether is not financial fraud, nor is it lying about reserves. Furthermore, I have tremendous respect for those who founded and operate Tether. However, pardon my French, Ethena will disrupt Tether.
This article will be divided into two parts. First, I will explain why the Federal Reserve, the US Treasury, and large US banks associated with ZZ want to destroy Tether. Second, I will delve into Ethena. I will briefly introduce how Ethena is constructed, how it maintains its peg to the dollar, and its risk factors. Finally, I will provide a valuation model for Ethena's governance token.
After reading this article, you will understand why I believe Ethena is the best choice for providing synthetic dollars in the cryptocurrency ecosystem on public chains.
Note: A physically-backed fiat stablecoin refers to a coin where the issuer holds fiat currency in a bank account, such as Tether, Circle, First Digital (ahem… Binance), etc. A synthetically-backed fiat stablecoin refers to a coin where the issuer holds cryptocurrency hedged with short-term derivatives, like Ethena.
Envy, jealousy, and hate
Tether (ticker: USDT) is the largest stablecoin by token circulation. 1 USDT = 1 USD. USDT is transferred between wallets on various public chains like Ethereum. To maintain its peg, Tether holds $1 in a bank account for each circulating unit of USDT.
Without a USD bank account, Tether cannot fulfill its functions of creating, holding USD-backed USDT, and redeeming USDT.
Creation: Without a bank account, USDT cannot be created because traders have nowhere to send their dollars.
USD Custody: Without a bank account, there is nowhere to hold the USD backing USDT.
Redemption of USDT: Without a bank account, USDT cannot be redeemed because there is no bank account to send dollars to redeemers.
Having a bank account is not enough to ensure success because not all banks are equal. There are thousands of banks globally that can accept USD deposits, but only certain banks have primary accounts at the Federal Reserve. Any bank wishing to clear USD through the Federal Reserve to fulfill its USD agent bank obligations must hold a primary account. The Federal Reserve has complete discretion over which banks it grants primary accounts.
I will briefly explain how correspondent banking works.
There are three banks: Banks A and B are headquartered in two non-US jurisdictions. Bank C is a US bank with a primary account. Banks A and B want to transfer USD within the fiat financial system. They each apply to use Bank C as their correspondent bank. Bank C assesses the banks' customer base and approves them.
Bank A needs to remit $1000 to Bank B. The flow of funds is $1000 from Bank A's account at Bank C to Bank B's account at Bank C.
Let's slightly alter the example by adding Bank D, also a US bank with a primary account. Bank A uses Bank C as its correspondent, and Bank B uses Bank D. Now, what happens if Bank A wants to remit $1000 to Bank B? The flow of funds is Bank C transferring $1000 from its account at the Federal Reserve to Bank D's account at the Federal Reserve. Bank D then deposits $1000 into Bank B's account.
Typically, banks outside the US use correspondent banks to wire USD globally. This is because once USD flows between different jurisdictions, it must be cleared directly through the Federal Reserve.
Since 2013, when I got involved in cryptocurrencies, typically, banks where cryptocurrency exchanges hold fiat currency are not US-registered banks, meaning they rely on a US bank with a |
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Post time 21-3-2024 15:48:30
