Why is Ethena the best choice for providing synthetic dollars in the encryption ecosystem on-chain?

The dust from the crust returned to Hokkaido, Japan as scheduled. During the day, the sun shines brightly and it is warm like spring, but at night it becomes bone-chillingly cold. This weather pattern causes severe snow conditions known as "crust dust." Beneath the seemingly beautiful and flawless heavy snow lies ice and brittle snow. Unpleasant.

As the footsteps of winter giving way to spring quicken, I want to revisit the article "Dust on the Crust" published a year ago. In that article, I proposed how to create a fiat stablecoin that exists without relying on traditional banking systems and is backed by physical assets. My idea was to combine the long and short positions of perpetual futures contracts in cryptocurrency to create a synthetic fiat currency unit. I named it "Nakadollar" because I envisioned using Bitcoin and XBTUSD’s "perpetual" short futures contracts as a means to create a synthetic dollar. At the end of the article, I pledged to do my best to support a trustworthy team to bring this idea to fruition.

The changes over the year have been significant. Guy is the founder of Ethena. Before creating Ethena, Guy worked at a hedge fund with a market value of 60 billion dollars, investing in special areas such as credit, private equity, and real estate. Guy discovered problems during the DeFi Summer that started in 2020, and since then, things have spiraled out of control. After reading the book "Dust on Crust," he came up with the idea of launching his own synthetic dollar. But like all great entrepreneurs, he wanted to improve on my original idea. He wanted to create a synthetic dollar stablecoin using ETH instead of BTC. At least that was the case at the beginning.

The reason Guy chose ETH is that the Ethereum network provides native yield. To ensure security and process transactions, Ethereum network validators pay a small amount of ETH for each block directly through the protocol. This is what I mean by ETH staking yield. In addition, since ETH is now a deflationary currency, there is a fundamental reason why ETH/USD forwards, futures, and perpetual swaps continue to trade at a premium compared to spot. Short perpetual swap holders can capture this premium. By combining physical ETH staking with a short position in ETH/USD perpetual swaps, a high-yield synthetic dollar can be created. As of this week, the annual yield of spot ETH USD (sUSDe) is approximately >50%.

Without a capable team to execute, even the best ideas are just talk. Guy named his synthetic dollar "Ethena" and has assembled a star team to launch the protocol quickly and securely. In May 2023, I became a founding advisor and, in exchange, received governance tokens. In the past, I have worked with many high-quality teams, and the staff at Ethena do not take shortcuts and complete tasks excellently. Fast forward 12 months, Ethena stablecoin USDe officially launched, and just 3 weeks after going live on the mainnet, the issuance has approached 1 billion (TVL is 1 billion dollars; 1 USDe = 1 dollar ).

Let me put aside my knee pads and candidly discuss the future of Ethena and stablecoins. I believe that Ethena will surpass Tether to become the largest stablecoin. This prediction will take many years to come true. However, I want to explain why Tether is both the best and worst business in cryptocurrency. It is considered the best because it may be the financial intermediary that allows the most profit for every employee in traditional finance and cryptocurrency. It is deemed the worst because Tether's existence is to please its poorer traditional banking partners. The jealousy of banks and the issues Tether brings to the guardians of the American peaceful financial system could potentially lead to Tether's immediate downfall.

To all those misled Tether skeptics, I want to make it clear. Tether is not a financial fraud, nor has it lied about its reserves. Moreover, I have great respect for those who founded and operate Tether. However, I must say, Ethena will disrupt Tether.

This article will be divided into two parts. First, I will explain why the Federal Reserve (, the U.S. Treasury, and large American banks with political ties want to destroy Tether. Secondly, I will delve into Ethena. I will briefly introduce how Ethena is built, 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-chain.

Note: The fiat-backed stablecoins refer to coins issued by entities that hold fiat currency in a bank account, such as Tether, Circle, etc. The synthetic fiat-backed stablecoins refer to coins whose issuers hold cryptocurrencies hedged with short-term derivatives, such as Ethena.

Envy, jealousy, hatred

Tether) code: USDT( is the largest stablecoin calculated by token circulation. 1 USDT = 1 dollar. USDT is sent between wallets on various public chains such as Ethereum. To maintain the peg, Tether holds 1 dollar in a bank account for each circulating unit of USDT.

If there is no US dollar bank account, Tether cannot fulfill its functions of creating USDT, holding the US dollars that support USDT, and redeeming USDT.

Creation: Without a bank account, USDT cannot be created, as traders have no place to send their dollars.

Dollar custody: If you do not have a bank account, there is nowhere to store the US dollars supporting USDT.

Redeeming USDT: Without a bank account, you cannot redeem USDT, as there is no bank account to send US dollars to the redeemer.

Having a bank account is not sufficient to ensure success, as not all banks are equal. There are thousands of banks worldwide that can accept dollar deposits, but only certain banks have master accounts with the Federal Reserve. Any bank wishing to clear dollars through the Federal Reserve to fulfill its dollar correspondent banking obligations must hold a master account. The Federal Reserve has complete discretion over which banks may obtain a master account.

I will briefly explain how correspondent banking works.

There are three banks: Bank A and Bank B are headquartered in two non-U.S. jurisdictions. Bank C is a U.S. bank with a master account. Banks A and B wish to transfer U.S. dollars within the fiat financial system. They each apply to use Bank C as their agent bank. Bank C evaluates the customer base of the two banks and grants approval.

Bank A needs to remit 1000 dollars to Bank B. The funds flow is 1000 dollars from Bank A's account at Bank C to Bank B's account at Bank C.

Let's make a slight modification to the example and add Bank D, which is also a U.S. bank with a master account. Bank A will use Bank C as its correspondent bank, while Bank B will use Bank D as its correspondent bank. Now, if Bank A wants to transfer 1000 dollars to Bank B, what will happen? The fund flow is that Bank C transfers 1000 dollars from its account at the Federal Reserve to Bank D's account at the Federal Reserve. Finally, Bank D deposits the 1000 dollars into Bank B's account.

Typically, banks outside the United States use correspondent banks to wire transfer US dollars globally. This is because when dollars move between different jurisdictions, they must be settled directly through the Federal Reserve.

I started getting involved with cryptocurrency in 2013. Usually, the banks that hold fiat currency for cryptocurrency exchanges are not banks registered in the United States, which means they need to rely on a U.S. bank that has a master account to handle fiat deposits and withdrawals. These smaller non-U.S. banks are eager for deposits and banking business from cryptocurrency companies because they can charge high fees without paying any interest on deposits. Globally, banks are typically eager to obtain cheap dollar funding, as the dollar is the global reserve currency. However, these smaller foreign banks must interact with their correspondent banks to handle dollar deposits and withdrawals outside their location. While correspondent banks tolerate the fiat flows associated with cryptocurrency businesses, for whatever reason, sometimes certain cryptocurrency clients are excluded from small banks at the request of the correspondent bank. If small banks do not comply with regulations, they risk losing their correspondent relationships and the ability to transfer dollars internationally. Banks that lose dollar liquidity are like zombies. Therefore, if the correspondent bank requests it, small banks will always abandon cryptocurrency clients.

When we analyze the strength of Tether's banking partners, the development of this agency banking business is crucial.

Tether's banking partners:

• Britannia Bank & Trust
• Cantor Fitzgerald
• Capital Union
• Ansbacher
• Deltec Bank and Trust

Among the five listed banks, only Cantor Fitzgerald is a bank registered in the United States. However, none of these five banks have a Federal Reserve master account. Cantor Fitzgerald is a primary dealer that helps the Federal Reserve execute open market operations, such as buying and selling bonds. Tether's ability to transfer and hold US dollars is entirely subject to the whims of its correspondent banks. Given the size of Tether's U.S. Treasury bond portfolio, I believe their partnership with Cantor is crucial for continuing access to that market.

If the CEOs of these banks did not negotiate for equity in Tether in exchange for banking services, then they are fools. You will understand the reason when I later introduce the per capita income metrics of Tether's employees.

This covers the reasons why Tether's banking partners have performed poorly. Next, I would like to explain why the Federal Reserve does not like Tether's business model, and fundamentally, why this is related to how the U.S. dollar money market operates, rather than being related to encryption.

Full Reserve Banking

From the perspective of traditional finance, Tether is a full-reserve bank, also known as a narrow bank. A full-reserve bank only accepts deposits and does not issue loans. The only service it provides is remittance. It pays almost no interest on deposits because depositors do not face any risk. If all depositors request to withdraw their money at the same time, the bank can immediately meet their demands. Therefore, it is called "full reserve". In contrast, the loan amount of a fractional-reserve bank is greater than the amount of deposits. If all depositors simultaneously request their deposits back from a fractional-reserve bank, the bank would collapse. Fractional-reserve banks pay interest to attract deposits, but depositors face risks.

Tether is essentially a fully backed dollar bank that provides dollar transaction services powered by public chains. That's it. No loans, no interesting stuff.

The Federal Reserve does not dislike full-reserve banks because of who their customers are, but rather because of how these banks handle their deposits. To understand why the Federal Reserve detests the full-reserve banking model, I must discuss the mechanisms of quantitative easing ) QE ( and its impacts.

The banks collapsed during the 2008 financial crisis because they did not have enough reserves to cover the losses from bad mortgages. Reserves are the funds that banks hold at the Federal Reserve. The Federal Reserve monitors the size of bank reserves based on the total amount of outstanding loans. After 2008, the Federal Reserve ensured that banks would never lack reserves. The Federal Reserve achieved this by implementing QE.

QE is the process by which the Federal Reserve buys bonds from banks and credits the reserves held by the Federal Reserve to the banks. The Federal Reserve conducts QE bond purchases worth trillions of dollars, leading to an expansion of bank reserve balances. Great!

Quantitative easing did not cause rampant inflation in a noticeable way like the COVID stimulus checks did, as bank reserves remained at the Federal Reserve. The COVID stimulus measures were directly handed to the public for discretionary use. If banks were to lend out these reserves, the inflation rate would immediately rise post-2008, as this money would be in the hands of businesses and individuals.

The existence of fractional reserve banks is to issue loans; if banks do not issue loans, they cannot make money. Therefore, under the same conditions, fractional reserve banks are more willing to lend reserves to paying customers rather than leaving them at the Federal Reserve. The Federal Reserve faces a problem. How do they ensure that banks...