Dialogue with Ethena Founder: USDe Rises to Top Three, $260 Million Buyback Initiated, Where is ENA Aiming at in the Windfall?

Original Title: Hivemind: Ethena Founder, the GENIUS Act & Overvalued L1s

Original Author: Empire

Original Compilation: Baihua Blockchain

Recently, Ethena's (ENA) USDe stablecoin has gained significant attention, with its market capitalization skyrocketing from $140 million to $7.2 billion within a year, an increase of over 50 times. Following the passage of the GENIUS Act, Ethena Labs quickly partnered with the U.S. federal crypto bank Anchorage Digital to launch the first GENIUS-compliant, federally regulated stablecoin USDtb, bringing compliant stablecoins to retail investors in the U.S. They also launched StableCoinX, raising $360 million, planning to list on Nasdaq, and initiated a $260 million buyback plan, igniting market enthusiasm.

Recently, Ethena founder Guy Young was interviewed by Hive Mind host Jose Madu, revealing the reasons behind Ethena's rapid rise in the stablecoin sector and his views on the current market landscape.

Here are excerpts from the podcast:

Q1: Guy, you made a significant announcement this week regarding USDe assets, entering the treasury bond company space. Can you share some background on this and why it’s important?

Guy Young: Of course. We started preparing for this project back in December or January. At that time, the market wasn't as hot as it is now, and similar projects are emerging almost daily. Seeing Circle's performance in the public market, we realized that the traditional market's demand for this type of theme far exceeds supply, with a lot of capital eager to invest, which presents an interesting opportunity for us.

From a macro perspective, over the past 18 months, I have been concerned about the capital flow in cryptocurrency altcoins. The total market cap of altcoins in 2021 and 2024 is nearly the same, just below $1.2 trillion. This is a strong signal for me, indicating that the global willingness to invest in these 99% bubble tokens is limited. The industry needs to mature; to break through the $1.2 trillion market cap, it must attract equity market investors who handle large-scale funds.

What we value is not the short-term trading of assets at high premiums, but rather opening up a broader investor base. Even offering token access at 1x net asset value is better than being completely shut out of these markets. This is an interesting match, as the traditional market has strong demand for this type of theme, while the crypto market faces capital flow issues, and our solution can address that.

Q2: The news about USDe assets is very exciting. When will trading begin? How much total funding has been raised? Can you share more details? Ethena Labs tweeted that this is the project with the highest cash-to-asset market value ratio; can you elaborate on that?

Guy Young: The total scale of the project is about $360 million, of which $260 million is cash. Our cash ratio is much higher than other similar projects because many projects are merely liquidity exit tools, where investors hope to sell tokens in the public market after investing. Our goal is to bring in new cash to solve the capital flow issue. The funds raised by Ethena account for about 8% of the circulating market value, which will be used to purchase tokens in the public market, while the second-ranked Hype accounts for less than 2%. This is very prominent in the market; relative to the underlying asset scale, our project size is substantial, and the cash raised will have a significant reflective effect on the tokens. For example, $500 million has little impact on Ethereum, but it significantly affects our tokens.

Q3: There is a strong demand for pure equity exposure in stablecoins, and the regulatory environment is becoming increasingly friendly, such as the passage of the Genius Act and the market's enthusiastic support for Circle. Can you discuss the challenges Circle faces, such as the impact of declining treasury rates on your business?

Guy Young: Thank you for the question. Let me explain Ethena's appeal to public market investors and institutional audiences, as well as the operational mechanism and competitive advantages of USDe.

The use cases for stablecoins are very diverse, such as serving as collateral for centralized exchanges or providing dollar payment and remittance channels for developing countries. In the future, each issuer will focus on specific niche markets rather than trying to be a universal solution.

Ethena's strategy is clear: we focus on use cases where we can perform ten times better than other players. As a startup competing with giants worth tens of billions, we don't believe we can win comprehensively, but we choose to focus on savings use cases.

A dollar asset with structurally higher returns is a better savings tool compared to a non-yielding asset. This advantage also extends to other scenarios, such as being used as collateral for perpetual contracts or embedded in DeFi applications to create new products. This is Ethena's niche market and the area where we achieve growth.

In 2024, the average annualized yield of USDe reached 18%, four times that of Circle's interest income. Adjusted for yield, Ethena's asset scale is equivalent to $28 billion, comparable to Circle. This means we can compete with giants in revenue without a massive balance sheet.

As for competitors, we view Tether as a partner rather than a rival. Many people don't realize that Ethena actually supports global Tether holders. In centralized finance (CeFi), 70% of the perpetual contract market is denominated in Tether, and the $1 collateral flowing into Ethena translates to about a 70-cent increase in Tether supply. Tether does not provide yield because its returns are indirectly paid by the market through futures and basis trading.

Ethena has productized the use case of capturing Tether's basis in CeFi, creating new products. You could say Ethena is the "yield version" of Tether; most of the collateral we hold is Tether itself, which significantly drives Tether's growth.

Q4: Listeners may not be very familiar with Ethena, but can you briefly introduce how you generate yield?

Guy Young: The core strategy is cash arbitrage or basis trading: going long on spot while shorting futures or perpetual contracts. There are financing rates in the cryptocurrency market, simply understood as the cost of capital for going long. These markets rise over time, and investors are willing to pay for leverage to go long. Ethena profits by capturing the speculative premium in the derivatives market.

To draw a comparison, all dollar assets or stablecoins are a form of lending. Buying Circle's USDC is akin to lending money to the U.S. government in exchange for an IOU; purchasing Sky's dollar assets involves over-collateralized lending in DeFi with Ethereum; while USDe provides financing for long positions in CeFi. The different borrowing counterparts determine the different returns.

Q5: During the 2021 cycle, some major coins had basis trading as high as 50-60% for several months. But now, with increased liquidity in the futures market and the entry of professional fund managers and ETFs, the basis has clearly compressed. What dynamics have you experienced internally? With the launch of long-tail assets like Solana ETFs and more opportunities for professional fund managers, how do you see this developing?

Guy Young: The capital pools for ETF and CME (Chicago Mercantile Exchange) basis trading are entirely different from those in the cryptocurrency market. Institutions like Millennium cannot invest in the cryptocurrency market due to the need for AA-rated custodians. Therefore, traditional finance (TradFi) conducts a lot of trading at CME, where credit risk is almost zero, but cannot touch the cryptocurrency market. This leads to significant differences between the basis at CME and that in the cryptocurrency market, reflecting some of the credit risk of the exchanges.

Data from 2024 shows that the cash-adjusted basis at CME is about 6.5%, which is 150 basis points higher than treasury yields, while Ethena's USDe yield reaches 18%, with a gap of up to 1000 basis points. Although CME supports these trades, it is more efficient through Ethena.

Many hedge funds are putting capital into Ethena because USDe is not all used for staking (sUSDe). When USDe is used as currency in AMMs (automated market makers) or order books, the staking rate does not reach 100%, so Ethena's yield is always higher than the yield from capturing the basis on their own. Although the basis will compress over time, we hope institutional capital flows into Ethena because it is a more efficient channel. This is one of our investment logics. Some criticize that the basis has dropped from 60% when we launched, but this is a natural phenomenon. Ethena continuously grows by lowering the capital cost in the cryptocurrency market to reasonable rates in traditional finance (like 10-12%), rather than 20-30%.

Q6: People usually focus on the high financing rates of certain coins, but Ethena has lowered these rates, which may obscure the scale or speculative nature of long positions. What are your thoughts on this?

Guy Young: That is indeed the case. The market was hotter before Ethena emerged, especially with BTC and ETH. Observing the financing rates on Hyperliquid is a good approach. Currently, Hyperliquid's financing rate is about 25%, while Binance is at 11%. There are two reasons: first, Hyperliquid's retail capital flow is more natural, while centralized exchanges have more institutional investors; second, Hyperliquid does not have portfolio margin, so you cannot fully collateralize a $100 perpetual contract short with $100 of BTC.

Therefore, its financing rate needs to be adjusted to compare with CeFi. Ethena has not yet operated on Hyperliquid, so Hyperliquid reflects the true retail capital flow that is not influenced by institutional capital and Ethena, making it an ideal reference point for assessing the market's real heat.

Q7: Recently, a long-awaited event has occurred in the cryptocurrency space—the passage of the Genius Act, the first federal law targeting stablecoins. You announced a partnership with Anchorage, which seems to make you the first stablecoin compliant with the Genius Act. Can you talk about the Genius Act, your views on it, and the details of this partnership and its significance for Ethena?

Guy Young: We are transitioning our issuance structure from an offshore BVI entity to direct issuance of USDtb by Anchorage. Anchorage is the only federally regulated bank in the U.S. that handles cryptocurrencies, and they will launch a suite of products similar to providing "Genius services" for different issuers to meet compliance requirements. Our strategy is dual-track: through our partnership with Anchorage, USDtb will comply with the Genius Act and can be used in any scenario in the U.S. that allows payment stablecoins; while USDe primarily exists in the offshore DeFi market, outside the regulated financial system in the U.S.

Both markets are important, but our excitement about entering the U.S. market lies in the fact that the main use cases for stablecoins actually exist outside the U.S. Americans can already access instant digital cash through applications like Venmo, just in a different form. The competition in the U.S. market is also fiercer, as money market funds coexist with stablecoins, limiting income potential. While we are excited about entering the U.S. market, the offshore market remains the most vibrant operating space. Tether's success proves this, as they have focused on the offshore market from the beginning.

Q8: I'm curious; the stablecoin market is very hot right now, and everyone is discussing them. It seems that every big company has its own stablecoin strategy, and there are many infrastructure startups, like Tether chain or others being built. What are your thoughts on this? You must have deep insights into the market. What do you find most interesting in the current stablecoin market? Which are overvalued? Which are undervalued?

Guy Young: I am quite pessimistic about new issuers entering the market and competing with existing giants. The market is excited about this topic, but it’s hard to find a breakthrough point. Stablecoin products are highly commoditized, making it difficult for startups to differentiate themselves from existing giants.

Stablecoins need to meet three conditions: they must be dollar-backed, or they will be out the next day; in terms of liquidity, you cannot reach Tether's daily trading volume of $100 billion on the first day; and third is returns.

If stablecoins are backed by treasury bonds, the profit margins will lead to bottom-up competition. Circle has already started this competition, sharing profits with Coinbase and others. I have a negative view of the unit economics and business models of stablecoin issuers. Tether is an exception; they established an unshakeable position at a unique point in time. No one can replicate their success at that specific moment. I am pessimistic about new issuers claiming to share 90% of profits; it’s a tough road. To make a business model work, if you only earn 5 to 10 basis points of profit, you need $100 billion in scale to become an attractive investment project. Therefore, I am most pessimistic about this part of the market, even though we ourselves are issuers of dollars and stablecoins.

Q9: Previously, we discussed stablecoins. If $3.5 trillion in funds were to become liquid stablecoins, especially flowing into the crypto market, some of that money might flow into Bitcoin, which is very exciting. The crypto market has performed well recently, with ETH/BTC ratios returning above 0.03, outperforming BTC. Solana has also performed well. What are your thoughts? Will the market continue to rise? At what stage of the cycle are we?

Guy Young: Long-term, I remain very bearish on ETH and other Layer 1 (L1) assets, believing they are the most overvalued financial assets in history. In the short term, the narrative around ETH has changed; it is no longer competing with Solana for on-chain activity but is positioned as a tool to attract traditional financial capital, competing with BTC.

As long as these tools trade at 2.5 to 4 times net asset value (NAV), the market will not decline. However, if the premium slides from 1.5 times to 1 time, it could signal the end of the cycle. When new tools stop coming online, the premium may collapse because existing tools need buy-side support from the equity market. Without sufficient buy-side, the market could collapse. Currently, new capital is still flowing in, and market enthusiasm is high; for example, Saylor just increased his issuance scale from $500 million to $2 billion, and tools are still trading at high premiums, which may continue. However, we need to be alert to signs of a slowdown in new tools, as that could be a market turning point.

I won’t comment on our own project, but examples like Hyperliquid have already detached from reliance on ETH or L1, relying on cash flow growth, like true equity-like assets. Altcoins need to mature; they can no longer just be the beta of L1 but must have independent revenue and users. In the future, 5 to 10 projects like Hyperliquid may be priced based on equity investment logic, decoupling from L1. I believe BTC's dominance should reach 90%, and other L1 valuations should drop to one-tenth of what they are now, with a few equity-like businesses standing out, similar to how Coinbase and Robinhood performed this year.

Q10: Regarding Ethena, USDe has reached a scale of $6.8 billion. How large do you think the market can support? If everyone knows Ethena's yield, how large can the perpetual contract futures market support?

Guy Young: The market potential is enormous. Currently, the open interest is about $110 billion to $120 billion, with yields of 15-20%. The three major sources of cash flow in the crypto space are Binance equity, Tether equity, and futures market basis trading. Ethena occupies 6-10% of the derivatives market, and I believe it should reach 20-25%, which is $20 billion to $30 billion, assuming the market does not grow significantly.

When financing rates reached 30% last December, Ethena's scale had already reached $28.8 billion. If we connect with traditional financial institutions, the scale could be larger, with rates compressed to 10-12%. However, if L1 valuations decline, products like Hyperliquid and Ethena that rely on L1 will also be affected. A few projects like Pump are making money through new token issuance without fully relying on L1 valuations.

Recommended Reading:

Stablecoins Breaking Out: In-Depth Analysis of 12 Countries' Stablecoin Regulatory Policies

In the Eye of the Regulatory Storm: A Detailed Explanation of the Three Major Bills from "Crypto Week" in the U.S.