Ethena Staked USDe

Ethena Staked USDe (sUSDe) is a reward-bearing token that users can obtain by staking their USDe. This process grants access to the protocol’s generated yield without requiring any further action from users. The value of sUSDe is designed to remain stable, even in scenarios where the protocol faces negative yields, as the assets are locked in the staking contract and cannot be withdrawn. Should there be any losses, they are expected to be covered by Ethena’s Insurance Fund.

Ethena's Staked USDe (sUSDe) is a crucial component of the Ethena protocol, allowing users to earn high yields on their USDe tokens. Here's how it works:

1. Staking: Users transfer their USDe tokens into the StakedUSDe smart contract, which is controlled by the Ethena dApp UI. This process is facilitated by the StakedUSDe smart contract, which implements the ERC4626 Token Vault standard for composability.

2. sUSDe Token: Upon staking, users receive sUSDe tokens, which represent a fractional interest in the USDe tokens held in the contract. sUSDe is an ERC20 token that appreciates over time, similar to swETH or rETH.

The yield generated by the Ethena protocol comes from two primary sources:

1. Staking Rewards: Holding stETH as collateral generates staking rewards, which serve as the base APY for USDe.
2. Funding and Basis Spread: The protocol also earns a yield from funding and basis spread through delta hedging derivatives positions. This yield can vary significantly, even on a daily basis.

1. Unstaking: When users unstake their sUSDe, the corresponding USDe tokens are burned, and they receive their principal amount of USDe along with their proportionate share of the deposited protocol yield.
2. Yield Distribution: The yield is distributed to stakers through an increase in the value of sUSDe. The protocol ensures that the value of sUSDe can only increase or stay flat over time, with no possibility of loss.

Ethena's Insurance Fund plays a crucial role in managing risks. If the protocol generated yield is not positive due to negative funding and basis spread, the Insurance Fund ensures that the underlying protocol collateral remains untouched. This fund covers any periods where the yield is not positive, ensuring that stakers do not lose their USDe.

• No Minimum Staking Period: Users can stake and unstake their USDe without any minimum period, allowing for flexibility.
• Cooldown Period: There is a 7-day cooldown period after requesting to unstake sUSDe before users can withdraw their USDe.
• External Markets: Users can sell their sUSDe on external markets if available, but Ethena Labs does not facilitate the creation of such markets.

Overall, Ethena's Staked USDe (sUSDe) offers a unique opportunity for users to earn high yields on their USDe tokens while maintaining the stability and flexibility of a synthetic dollar.

Ethena Staked USDe (sUSDe) has several strengths:

1. Stability and Yield Generation: sUSDe is a reward-bearing token that appreciates over time, tied to the exchange rate between the derivative token and the staked asset. Its value remains stable even in scenarios of negative yields, as the assets are locked in the staking contract and cannot be withdrawn. Any potential losses are expected to be covered by Ethena's Insurance Fund, providing added security to stakers.

2. Decentralized and Censorship-Resistant: Unlike centralized stablecoins like USDC and USDT, sUSDe is backed by crypto assets, making it a decentralized and censorship-resistant currency.

3. High Yield Potential: sUSDe offers high yields from protocol-generated sources, with current annual percentage yields (APY) over 17% and reaching as high as 100% in the past.

4. No Minimum Staking Period: There is no minimum staking period for sUSDe, allowing users to stake and unstake freely without any restrictions.

5. Principal Protection: Users will always receive the principal amount of USDe staked as well as their proportionate share of the deposited protocol yield upon unstaking, ensuring that stakers cannot lose USDe by staking.

6. Composability: The StakedUSDe smart contract implements the ERC4626 Token Vault standard, making it compatible with other user interfaces beyond the Ethena dApp, enhancing its usability and flexibility.

Ethena Staked USDe (sUSDe) faces several risks that could impact its stability and profitability. Here are some of the key risks:

1. Liquidation Risk: Ethena uses a delta-hedging strategy to maintain the peg of sUSDe. This involves opening short positions on centralized exchanges. If the market moves against these positions, Ethena may need to liquidate its collateral to cover losses, which could lead to a loss of value for sUSDe holders.

2. Funding Risks: sUSDe relies on funding payments from perpetual futures contracts. In a bear market, funding rates can become negative, requiring Ethena to make significant payments to long position holders. This could deplete the reserve fund and threaten the stability of sUSDe.

3. Centralized Counterparty Risks: Ethena's reliance on centralized exchanges for its derivatives model raises concerns about the risk of exchange insolvency or withdrawal freezes. While Ethena uses off-exchange settlement custodians to safeguard assets, the risk of exchange failures remains.

4. Regulatory Risks: Ethena's business model, which involves issuing a stablecoin and promising returns through trading strategies, may be construed as a collective investment scheme. This could lead to regulatory challenges and the need for fund management licenses in various jurisdictions.

5. Market Conditions: Ethena's profitability is largely driven by a delta-hedging trade strategy, which capitalizes on price discrepancies between futures and spot market prices. However, this strategy faces significant risks in a market condition called backwardation, where futures prices are lower than spot prices. This could lead to losses for Ethena and impact the stability of sUSDe.

6. Yield Sustainability: Ethena's high yields, which are generated through a tokenized "cash and carry trade," may not be sustainable in the long term. If funding rates become negative for a prolonged period, Ethena's reserve fund may need to grow significantly to maintain the stability of sUSDe.

7. stETH Collateral Risks: Ethena uses staked Ethereum (stETH) as collateral, which can lose its peg to Ether. While experts consider this risk to be low, it remains a potential threat to the stability of sUSDe.

These risks highlight the importance of careful risk management and monitoring for Ethena and its users to ensure the long-term viability of sUSDe.

• Guy Young: Co-founder and CEO of Ethena Labs, the team behind the synthetic dollar-pegged product USDe.