🛠️ Bitcoin fixed Ethena

Ethena, the synthetic dollar that’s totally not a stablecoin (wink wink) had an existential problem: it couldn’t scale past half a trillion dollars or so.

Luckily for the project, Bitcoin solves this dilemma.

USDe aims to hold its peg with a crypto-native basis trade (also known as a cash and carry). That effectively makes Ethena something of a hedge fund that sells tokenized exposure to its portfolio, $1 at a time, while forwarding revenue it earns onto token holders.

Here’s how it works:

• Each USDe token must be backed by $1 of assets in Ethena’s treasury at all times.

• For every ETH-related token backing USDe, Ethena opens a short ETH position through a derivative contract on a centralized exchange.

• This would turn its treasury delta-neutral: when ETH and stETH goes up, the short position loses equivalent value and vice versa — meant to hold the backing of each USDe token at even value.

The yield Ethena pays out, central to the “internet bond” moniker, comes from a mixture of staking rewards (from stETH and the like) and funding rates tied to its short ETH positions. Ethena currently makes up 20% of the total ETH open interest on centralized exchanges.

Most top stablecoins back their tokens 1:1 with cash or cash equivalents. Tether and Circle can, hypothetically, issue as many crypto-dollars as there are short-term US Treasurys, which run in the trillions. 

Tether and Circle together represent less than $140 billion, so there’s still plenty of room left for those to grow. Both issuers keep their very profitable Treasury yields to themselves.

Ethena’s protocol, meanwhile, backed its tokens with ether (ETH), USDT and liquid staking tokens like stETH. Instead of Treasurys, Ethena’s hypothetical upper limit is the market capitalization of the crypto it accepts as collateral, including, very soon, bitcoin, adding $1.3 trillion to its theoretical scaling ceiling at current prices.

Ethena pledging to back its stablecoin with bitcoin smells similar to Do Kwon’s rhetoric invoked when his algorithmic stablecoin Terra went bust in May 2022. The Terra ecosystem was worth $40 billion at the time, and its implosion bankrupted multiple firms and dragged crypto into its longest bear market ever by at least one metric. 

Like Kwon, Ethena Labs operates a “reserve fund,” which it says it will use to prop up USDe’s backing if funding rates on ETH (and soon BTC) turn negative, which would ruin its basis trade. Kwon threw bitcoin worth billions at UST’s peg — the source of the “steady lads” posts that Ethena now regularly gets on X — but it wasn’t enough. USDe has so far held its peg, mostly, after launching in December.

USDe has so far held its peg, mostly, after launching in December.

There are fundamental differences between Terra and Ethena, however. Concerns about the basis trade’s reputation for blowing up traditional hedge funds aside, Ethena has its own unique risks outside of funding rates, including a reliance on centralized operators and other third parties.

Collateralizing a stablecoin with crypto and liquid staking tokens and hoping to hold its peg with short positions sounds crazy. That’s because it is, especially for one intended as a trading tool and savings vehicle for every person on Earth.

Crazy stuff gets built on blockchain rails every day that probably shouldn’t work, but sometimes it does, and there’s currently $2 billion betting that Ethena will succeed.

Isn’t watching monstrously expensive experiments be set free in an anarcho-capitalist, hyperdriven sandbox, really the whole point?

— David Canellis

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📈 We’re so back

It’s been a week filled with venture capital news, as firms like Paradigm and Galaxy reportedly plan to raise multi-million dollar funds. 

Pitchbook analyst Robert Le said that interest in the VC sector has been picking up in the last five or so months, due not only to the overall market but the fact that “crypto tokens are up.”

“Last year, you saw very few projects launch tokens and now you're starting to see that come to market and so, these funds from a portfolio construction, they're starting to see positive returns on a lot of investments that they made in the 18 month to two year timeframe,” Le told Blockworks. 

This has created, Le added, the opportunity for the funds to tell limited partners (LPs) that the funds are performing well, allowing another fund to be created and raised. Paradigm is an example of that, Le further noted. 

While the VC money is trickling in, this is not enough of a sign that we’re in a full-fledged bull market. Le cautioned “we’re still a bit early.”

According to Pitchbook data, the first quarter of 2024 saw 485 deals worth $2.5 billion. That amount, Le noted, is chump change when looking at the top of the last bull market cycle, which boasted $10.9 billion in a single quarter. 

The market may not be ready, even closer to a top, to generate over $10 billion in VC deals, but Le expects to see around $7 or $8 billion. He further believes that the opportunity has “grown much larger over the last two years.

The second quarter has only just begun, and the race to the first billion-dollar fund of the cycle is on as Paradigm seeks to raise up to $850 million. But if one thing’s certain, even without the support of a bull market, VC activity is back.

— Katherine Ross

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💸 Ripple is a stablecoin company now 

Ripple is launching a dollar-backed stablecoin. 

The token will be issued on XRPL and Ethereum, the company said, with plans to expand to other blockchains in the future. Like USDC, the token will be backed by USD, short-term US Treasurys and other cash equivalents, according to Ripple. 

Ripple has an accountant lined up for audits, although it didn’t name names. Hopefully they found someone good — audits have proven to be a challenge for crypto firms in recent years.

Only about half of top crypto companies have completed full third-party audits or published reviewed attestations, a 2023 Bloomberg survey found. Many companies, including Binance and Bitfinex, have complained that Big Four accounting firms won’t touch them.

Circle says its monthly USDC attestation statements are reviewed by Deloitte & Touche LLP. Tether says it worked with accounting firm BDO for its January audit. 

In July 2023, the Securities and Exchange Commission issued a warning to accounting firms that engage with crypto companies, reminding them auditors could be held liable for anti-fraud violations. Accounting firms can’t just take crypto companies at their word, the SEC’s chief accountant said, and clients have been known to “misrepresent” the facts. 

For Ripple, though, there’s bigger fish to fry than finding an auditor. Bringing more activity on XRPL is never a bad thing, especially when the legal bills are mounting and civil penalties are looming. 

It’s possible Ripple will have to pay a $2 billion penalty following the SEC’s case against the company. That’s what the agency has suggested to the court, at least. Ripple won a partial judgment in its case with the SEC, but the judge still found that Ripple’s institutional sales of XRP violated securities laws. 

The SEC only last week submitted its penalty recommendation to the court, so we’ll see how Ripple counters. Even if it’s not $2 billion — which it probably won’t be — the sum is still expected to be large. 

— Casey Wagner

• Bhutan’s state-backed bitcoin mine is pursuing upgrades ahead of this month’s block reward halving, Bloomberg reports. 

• Sony Bank, one of Japan’s major online banks, is testing stablecoins, according to Nikkei.

• Blockspace Media released a new bitcoin mining documentary on X. 

• There’s an “underground race” involving major tech firms to buy AI training data, Reuters reports.

• Another AI-related battle is also playing out: talent among top firms like Meta, according to Business Insider.

Next time someone asks about a use case for crypto, tell them about farming. And this time, I don’t mean for airdrops.

X user Richard Opany apparently used his Worldcoin airdrop to buy a goat and named it Sam, after Worldcoin founder Sam Altman. 

An account for Worldcoin developers joked: “your users are farming. our users are farming. we are not the same.”

But it doesn’t end there. After Opany’s posts caught the attention of the crypto community on X, folks sent him crypto to buy more goats. Opany has since added at least two more goats – Higher and Base — to his herd.

It’s safe to say that the crypto community is the GOAT. 🐐

— Katherine Ross