Ethena Labs Raises $14M for Synthetic Dollar

Ethena Labs has raised $14m to develop a synthetic dollar based on Ethereum aiming to provide stability and efficiency in the international markets.

US dollar-denominated financial instruments present a fresh opportunity for international markets. That is the wager of Ethena Labs’ wager, a company that has raised $14 million to develop a synthetic dollar based on Ethereum. 

On February 16, Ethena’s team revealed the funding which was provided among other investors by Dragonfly, a venture capital firm among other investors. The business received $6 million from Binance Labs, Gemini, Bybit, OKX Ventures, Mirana Ventures, and Deribit in an earlier funding round in 2023 to establish decentralized finance systems based on the Ethereum network. 

Staked Ether (ETH) will be used as collateral to fund delta-hedging techniques that support the USD, a synthetic dollar. According to DefiLlama data indicates that since the product’s inception in December, $200 million worth of value has been locked into the product since its inception in December. 

The business stated that “USD maintains its rough target for the U.S. dollar by delta-hedging assets provided by users minting USD to short-staked Ethereum collateral using perpetual swaps to achieve ‘delta-neutral’ stability.” In other words, USD uses a variety of hedging techniques to keep its peg to the US dollar.

In contrast to conventional stablecoins, which rely on direct collateral or algorithmic techniques to preserve their value, it makes use of financial derivatives, such as arbitrage and perpetual swap contracts to guarantee that the value of the digital currency stays constant with respect to the dollar. 

In spite of issuers fully internalizing the yield Guy Young, CEO of Ethena Labs stated “We view stablecoins as the single most important instrument within crypto and the only idea that has found true product market fit, with over $130 billion of global demand.” 

For example, Tether Holdings Limited, the largest stablecoin issuer reported a “record-breaking net profit” of $2.85 billion in the final quarter of 2023, fueled by yields from its Tether (USDT) reserves, which include approximately $1 billion in interest from United States Treasury securities which serve as the stablecoin’s primary source of funding.

“The entire space relies on centralized stablecoins with collateral backing residing within the banking system — providing a crypto-native synthetic dollar alternative is, in our view, the single largest opportunity within the space.”

However, the synthetic dollar is not risk-free just because it has delta-hedging. In times of market stress and unanticipated developments counterparty risks and liquidity are always there. In order to reduce these risks, the business asserts that institutional-grade companies like Fireblocks, Copper, and Bitgo will hold and settle collateral. 

The “holy grail of crypto dollars,” as general partner at Dragonfly Tom Schmidt put it, “is stablecoins. They’ve grown massively in popularity over the past few years by providing access to USD-denominated savings and remittances for people around the world, but they’ve always been handicapped by one of these three issues [stability, censorship and capital efficiency].”