Author: Thejaswini, Source: Token Dispatch, Translated by: Shaw Jinse Finance
Every financial advisor you meet will start by giving you a sermon on compound interest.
Invest $500 per month in an index fund earning a 7% annualized return, and you'll have $1.3 million in 30 years. That sounds great, but by year 15, that $500 per month seems like a pittance. Your rent has doubled, you've had kids, and your definition of "enough money" has shifted from "enough to buy guacamole" to "enough money to buy a house in a good school district." The traditional path assumes your expenses remain constant while your money grows, but the reality is quite the opposite.
So when you hear about people making 15% to 20% annually through the cryptocurrency derivatives market, the first thing you think about isn’t the risk, but the timeline. Finally, a return that can outpace the rising cost of living.
What makes me want to dig deeper is this: a crypto protocol launched just 18 months ago has surpassed $12.4 billion in circulating supply in a short period of time, faster than any other digital dollar in history. While USDT didn’t reach $12 billion until mid-2020 (after years of slow growth), and USDC didn’t surpass $10 billion until March 2021, Ethena’s USDe surpassed both milestones in such a short time, a true speed race in the financial world.
USDe is exploiting structural inefficiencies in the crypto derivatives market .
This leads to the core question every investor, regulator and competitor is asking.
How did they do this so quickly? What are the actual risks? Is this sustainable? Or is it just another high-yield experiment waiting to crash?
I have attempted to answer most of these questions.
The world's largest arbitrage transaction
Ethena has found a way to turn the cryptocurrency market’s relentless demand for leverage into a money-printing machine. Here’s how it works, in a nutshell.
By holding cryptocurrency as collateral, short an equal amount of cryptocurrency futures contracts and earning the difference, you will obtain a synthetic dollar that remains stable while earning income from cryptocurrency's most reliable money printing machine.
Let's break this down a bit further. When someone wants to mint USDe, they deposit a crypto asset like Ethereum or Bitcoin. But Ethena doesn't just hold onto these assets and hope they remain stable (which, by the way, they don't). Instead, it immediately opens a short position of the same size on a perpetual contract exchange.
If ETH rises by $100, their spot position will increase by $100, but their short contract position will lose $100.
If ETH drops by $500, their spot position will lose $500, but their short contract will make a profit of $500 .
The end result – perfect stability in terms of US dollars .
This is called a delta-neutral position. You won't lose money due to price fluctuations, but you won't make money either.
So where does the 12%-20% return come from? There are three sources.
First , they stake ETH collateral and collect staking rewards(currently around 3%-4%).
Second , they charge what is known as a “funding rate” from shorting the contract.
In cryptocurrency perpetual swaps, traders pay funding fees every eight hours to maintain their positions. When more long positions outnumber short positions (which happens approximately 85% of the time), long positions pay short positions a fee. Ethena is always on the short side and collects these fees.
In 2024, the open interest weighted funding rate for Bitcoin averaged 11% and for Ethereum 12.6%. These are the actual cash flows that leveraged traders pay to anyone willing to bet against them.
Third , they can earn returns from the cash equivalents and Treasury securities held in their reserves. Ethena holds liquid and stable assets with partners, who pay additional returns. USDC pays loyalty rewards, while USDtb holders earn returns from BlackRock's BUIDL fund.
Taken together, these funding sources generated an average annualized return of 19% for sUSDe holders in 2024.
Over the past few years, cryptocurrency funding rates have averaged 8-11% annually. Add in staking rewards and other income streams, and you've got a comfortable return. Isn't that the point?
The Ethena ecosystem is driven by four tokens, each with a different function:
USDe is a synthetic USD unit that maintains a target price of $1 through delta-neutral hedging. It generates no rewards unless staked and can only be minted or redeemed by whitelisted participants.
sUSDe is a yield-generating token earned by staking USDe in an ERC-4626 protocol vault . Currently, all Ethena protocol revenue flows to sUSDe holders in the form of yield rewards. As Ethena regularly deposits protocol revenue, its value (in USDe) will increase. Users can unstake and redeem USDe after a cool-down period.
ENA serves as a governance token , allowing holders to vote on key protocol matters, such as eligible collateral assets and risk parameters. It also lays the foundation for the future ecosystem security model.
sENA represents staked ENA positions . A planned "fee switching" mechanism will distribute a portion of protocol revenue to sENA holders upon reaching certain milestones. Currently, sENA is eligible for ecosystem distributions, such as Ethereal's proposed 15% token allocation.
But there's a big catch. This model only works as long as people are willing to spend money to long on cryptocurrencies. If market sentiment reverses and funding rates turn negative, Ethena will start paying interest instead of earning returns.
Why 2025 will be Ethena's breakthrough year
A combination of factors has made USDe the fastest-growing digital dollar in history.
1. The perpetual futures market has seen explosive growth , with open interest in major Altcoin reaching a record high of approximately $47 billion in August 2025, and Bitcoin's open interest reaching $81 billion. This increase in trading volume means Ethena has more opportunities to earn funding rate benefits.
2. This accelerated growth stems from a form of financial engineering on steroids . Users discovered they could stake USDe to obtain sUSDe (yield-based), then tokenize their sUSDe holdings on Pendle (a yield derivatives platform), and then use these tokenized holdings as collateral on Aave (a lending protocol) to borrow more USDe. And so on.
This creates a recursive profit loop where experienced players can amplify their exposure to potential USDe gains. The result? 70% of Pendle’s total deposits are in Ethena assets.
Another $6.6 billion worth of Ethena assets are located on the Aave platform.
There are layers upon layers of leverage, all chasing those double-digit returns.
3. A special purpose acquisition company (SPAC) called StablecoinX announced plans to raise $360 million specifically for accumulating ENA tokens . The entity will use the proceeds to accumulate ENA tokens under a "perpetual capital" mandate, thereby creating a structural buyer, eliminating selling pressure, and supporting decentralized governance.
4. Ethereal, a perpetual decentralized exchange . Built specifically on USDe, Ethereal attracted $1 billion in total value locked (TVL) before its mainnet launch. Users deposited USDe to earn points for the eventual token issuance, creating another significant drain on the USDe supply and fueling anticipation for the first large-scale application built natively on the Ethena infrastructure.
5. Ethena, in partnership with Securitize, is building a permissioned L2 converged chain designed to facilitate the integration of traditional finance through a KYC-compliant infrastructure . Using USDe as its native fee token, the chain creates structural demand while also opening up access to institutional capital that otherwise would be unable to interact with permissionless DeFi.
6. The market expects the Federal Reserve to cut interest rates twice by the end of 2025, with an 80% probability of a September cut . When interest rates fall, traders typically increase risk-taking, pushing up funding rates. USDe yields are negatively correlated with the federal funds rate, meaning a rate cut could significantly increase Ethena's revenue.
7. Ethena’s Fee Switching Proposal . Ethena governance approved a five-point framework for activating revenue sharing with ENA holders. Four of the following five conditions have been met:
USDe supply exceeds $6 billion (currently at $12.4 billion), protocol revenue exceeds $250 million (over $500 million realized), Binance/OKX integration is achieved (achieved), and the reserve fund is sufficient (achieved). The last requirement—maintaining a yield spread of at least 5% higher for sUSDe than for sUSDtb—remains the only obstacle for ENA holders to receive a share of the protocol’s profits.
These conditions are governance-determined safeguards designed to protect the protocol and sENA holders from premature or risky revenue distributions. Milestones reflect benchmarks for protocol maturity, financial health, and market integration. Ethena aims to ensure its sustainability and value before fully unlocking revenue distributions.
Ethena has also been quietly forming partnerships with traditional financial businesses and cryptocurrency exchanges, making USDe usable everywhere from Coinbase to Telegram wallets.
Institutional FOMO
Unlike previous stablecoin experiments that have grown purely through crypto-native use cases, USDe is attracting the attention of traditional financial institutions.
Coinbase's institutional clients now have direct access to USDe. CoinList offers a 12% annualized rate on USDe through its yield program. Major custodians like Copper and Cobo are managing Ethena's reserves.
They are all relevant to institutional investors as they provide platforms, custody or services specifically designed to support accredited investors and institutional clients in the crypto markets.
This pattern is similar to what happened with USDC and USDT, but on a much shorter timescale. Major stablecoin providers took years to establish institutional relationships and compliance frameworks. Ethena did so in just months, partly due to a mature regulatory environment and partly because the yield opportunity was too compelling to ignore.
Institutional adoption brings credibility, credibility brings more capital, and more capital means higher funding rates, which in turn supports higher returns and ultimately attracts more institutions. As long as the underlying mechanism remains unchanged, it will act like a flywheel, continuously accelerating.
This speed comparison has an important premise. USDe doesn't need to prove the utility, security, or legitimacy of a stablecoin to the world. It enters markets where USDT and USDC have already done the heavy lifting in terms of institutional adoption, regulatory acceptance, and infrastructure development.
Leverage Squared
The high concentration of funds on Pendle and Aave creates what risk managers call a single point of failure. If Ethena’s model falters, it could impact not only USDe holders but the entire DeFi ecosystem that relies on Ethena’s money flow .
If Ethena fails, Pendle will lose 70% of its business. Aave will face massive capital outflows. Strategies that rely on USDe for returns will become ineffective. We will face a liquidity crunch across the entire DeFi ecosystem, not just the decoupling of stablecoins.
The most concerning aspect of Ethena’s development is how people use it . Recursive lending loops on Aave and Pendle create leverage multipliers, amplifying both returns and risks.
Users stake USDe for sUSDe, tokenize sUSDe on Pendle to obtain PT tokens, deposit PT tokens as collateral on Aave, borrow more USDe, and so on. Each cycle amplifies their exposure to the underlying yield of USDe, as well as any volatility or liquidity issues.
This is reminiscent of the CDO square structure that led to the 2008 financial crisis. A financial product (USDe) was used as collateral to borrow more money, creating recursive leverage that was difficult to unwind quickly.
Maybe I'm just overthinking it, but if funding rates remain negative, USDe could face redemption pressure. Leveraged positions would face margin calls. Protocols that rely on USDe's total value locked (TVL) would face massive outflows. Liquidations could occur faster than any single protocol can handle.
Every high-yield strategy eventually faces a question: what happens when it fails? For Ethena, there are several scenarios that could trigger a liquidation .
The most obvious scenario is a sustained negative funding rate . If crypto market sentiment remains bearish for weeks or months, Ethena will begin disbursing funds rather than receiving them. Their reserves (currently around $60 million) provide some cushion, but it's not unlimited.
A more serious risk is counterparty bankruptcy . While Ethena uses over-the-counter custody for its spot assets, they still rely on large exchanges to maintain their short contracts. If an exchange were to go bankrupt or be hacked, Ethena would need to quickly move its contract positions, potentially temporarily breaking its delta-neutral hedge.
The leverage loops of Aave and Pendle introduce additional liquidation risk . If the yield on USDe suddenly drops, recursive lending positions could become unprofitable, triggering waves of deleveraging and liquidations. This could create temporary selling pressure on USDe itself.
Regulatory risks are also increasing . European regulators have forced Ethena to relocate from Germany to the British Virgin Islands. As yield-generating stablecoins gain traction, they may face more compliance requirements or restrictions.
The battle for stablecoins
Ethena represents a fundamental shift in the stablecoin competition landscape . For years, this competition has focused on stability, applicability, and compliance. USDC and USDT compete on transparency and regulation, while various algorithmic stablecoins compete on decentralization.
USDe changed the game by competing on yield . It was the first major stablecoin to offer double-digit returns to holders while maintaining its peg to the US dollar. This put pressure on competing traditional stablecoin issuers, which were forced to retain all the returns on their US Treasury holdings while offering no returns to users.
The market is responding. USDe currently holds over 4% of the stablecoin market share, trailing only USDC (25%) and USDT (58%). More importantly, it's growing faster than either. Over the past 12 months, USDT has grown by 39.5% and USDC by 87%, but USDe has grown by over 200%.
If this trend continues, we may see a fundamental reshaping of the stablecoin market , with users shifting from zero-yield stablecoins to yield-yielding alternatives.
Traditional publishers must either share revenue with users or watch their market share be eroded.
Despite the risks, Ethena's momentum shows no signs of slowing down. The protocol just approved BNB as eligible collateral, and XRP and HYPE tokens have also met the threshold for future inclusion. This will expand its potential market beyond Ethereum and Bitcoin.
The ultimate test will be whether Ethena can maintain its yield advantage while managing systemic risk. If they can, they will have created the first scalable, sustainable yield dollar in cryptocurrency history. If they can't, we'll once again see the perilous story of chasing yield in volatile markets.
Regardless, the speed with which USDe reached $12 billion proves that when true innovation is combined with market demand, financial products can develop faster than anyone imagined .
