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Written by: thetokendispatch Compilation: Vernacular Blockchain A crypto protocol launched only 18 months ago, USDe's circulating market capitalization has reached $12.4 billion, setting a record for the fastest growth in the history of the digital dollar. In contrast, USDT didn't reach $12 billion until mid-2020 (after years of slow growth), while USDC only surpassed $10 billion in March 2021. And Ethena's USDe seems to have completed a speed spurt on the financial track. How did they do it so quickly? What are the risks behind it? Is this model sustainable, or is it just another Terra (Luna) that could collapse at any moment? The world's largest carry trade Ethena has found a way to transform the crypto market's never-ending thirst for leverage into a money-making machine. In simple terms: hold crypto assets while hedging the same amount of short positions in the futures market to earn the difference. This creates a stable synthetic dollar while also generating income from the crypto market's most reliable "money printing machine." How to do it? When someone wants to mint USDe, they need to deposit a crypto asset like Ethereum (ETH) or Bitcoin. But instead of just holding these assets (because they are too volatile), Ethena immediately opens an equal short position on the perpetual futures exchange. If ETH rises by $100, the spot position earns $100, but the short position loses $100. If ETH falls by $500, the spot position loses $500, but the short position gains $500. The result? The value of the US dollar has always remained stable regardless of price ups and downs. This is called a "delta neutral" strategy, where you don't make a lot of money or lose a lot of money because of price fluctuations. Where does that 12-20% gain come from? There are three sources: Staking Income: Ethena stakes deposited ETH to earn approximately 3-4% APY staking rewards. Funding rate: The funding rate they charge for short positions. In the crypto perpetual futures market, traders pay funding fees every 8 hours to maintain their positions. When bullish sentiment prevails in the market (about 85% of the time), bulls need to pay shorts. Ethena is always on the side of the bears, charging these fees. In 2024, Bitcoin's funding rate averaged 11% and Ethereum's 12.6%, which are tangible cash flows. Reserve Asset Income: Ethena holds cash equivalents and Treasury products, such as USDC's loyalty rewards or BlackRock's BUIDL fund, for additional income. In 2024, these sources have yielded an average APY of 19% for sUSDe holders. Over the past few years, the funding rate in the crypto market has averaged 8-11%, and with staking yields and other income, USDe's returns are enough to put people to sleep peacefully. Isn't that exactly what we are pursuing? Image source: ethena.fi The four major tokens of the Ethena ecosystem The Ethena ecosystem is backed by four tokens, each with different functions: USDe: A synthetic dollar with the goal of maintaining a stable value of $1, achieved through delta-neutral hedging. No yield is generated unless staked, and only whitelisted participants can mint or redeem them. Image source: ethena.fi/ sUSDe: Yield-bearing tokens obtained after staking USDe, stored in ERC-4626 vaults. All of Ethena's protocol revenue is distributed to sUSDe holders, with the value increasing with the fixed deposits of the protocol's revenue. Users can unstake after the cooldown period and exchange it back for USDe. ENA: A governance token where holders can vote on key protocol transactions, such as acceptable collateral assets and risk parameters. ENA will also support the security model of future ecosystems. sENA: The token that stakes ENA. In the future, the "fee switch" mechanism will distribute a portion of the protocol revenue to sENA holders, and currently sENA can receive ecosystem allocations, such as Ethereal's proposed 15% token allocation. But there is a big problem: all this is premised on the fact that the market continues to be bullish and willing to pay for long positions. If market sentiment reverses and the funding rate turns negative, Ethena will need to pay a fee, not a charge. This is a key risk, which we will dive into later. 2025 is the year of Ethena's outbreak USDe has become the fastest-growing digital dollar in history, driven by several forces: Perpetual futures market exploded: In August 2025, total open interest in major altcoins reached $47 billion, and Bitcoin reached $81 billion. The surge in trading volume means more funding rate opportunities, from which Ethena profits. Source: defillama.com Financial Engineering Frenzy: Users discover that they can obtain sUSDe (yield tokens) by staking USDe, tokenize sUSDe on Pendle (yield derivatives platform), and then use these tokens to collateral and lend more USDe on Aave (lending protocol), and the cycle goes on. This recursive yield cycle allows savvy players to amplify their exposure to USDe yields. Outcome? 70% of Pendle's deposits are Ethena assets, and there are another $6.6 billion in Ethena assets on Aave. This "leverage set leverage" gameplay chases double-digit returns. Image credit: dune SPAC boost: A SPAC called StablecoinX plans to raise $360 million specifically to accumulate ENA tokens, creating a "permanent capital" buyer, reducing selling pressure, and supporting decentralized governance. Ethereal Perpetual DEX: Ethereal, built for USDe, has attracted $1 billion in lock-up volume (TVL) before its mainnet launch. Users deposit USDe to earn points for future token airdrops, creating a significant demand for USDe. Convergence Chain: A permissioned L2 chain by Ethena in partnership with Securitize, using USDe as its native gas token attracts traditional financial institutions to enter through KYC-compliant infrastructure, creating structural demand. Fed rate cut expectations: The market expects two rate cuts by the end of 2025, with an 80% probability of a rate cut in September. Interest rate cuts usually stimulate risk appetite and drive up funding rates, and USDe's earnings are negatively correlated with the federal funds rate, and rate cuts could significantly boost Ethena's revenue. Image source: mirror.xyz Fee Switch Proposal: Ethena's governance adopts a five-metric framework to distribute revenue to ENA holders. So far, four items have been met: USDe supply exceeds $6 billion (now 12.4 billion), protocol revenue exceeds $250 million (exceeds 500 million), Binance/OKX integration (completed), and reserve funds are sufficient. The only unmet condition is that sUSDe needs to yield at least 5% higher than sUSDtb, which is a key guarantee to protect the protocol and sENA holders. Ethena has also established partnerships with traditional financial players and crypto exchanges, allowing USDe to be spread across platforms like Coinbase to Telegram wallets. Institutional boom Unlike earlier stablecoins that relied solely on crypto-native use cases, USDe has captured the attention of traditional financial institutions. Coinbase's institutional clients have direct access to USDe, CoinList offers USDe with 12% APY through its earning program, and major custodians like Copper and Cobo manage Ethena's reserve assets. This institutional adoption model is similar to USDC and USDT, but with a shorter time compress. While traditional stablecoins have spent years building institutional relationships and compliance frameworks, Ethena has done so in a matter of months. This is due to the mature regulatory environment and the attractiveness of high yields. Institutional adoption brings credibility, credibility attracts more capital, and more capital means greater funding rate capture, supporting higher returns and attracting more institutions. This is a flywheel that is constantly accelerating and can continue to operate as long as there is no problem with the underlying mechanism. However, it is important to note that USDe's rapid growth is due to the fact that USDT and USDC have paved the way, proving the usefulness, security, and legitimacy of stablecoins. The square of the lever USDe's high concentration on Pendle and Aave poses a "single point of failure" risk. If something goes wrong with Ethena's model, it will not only affect USDe holders but also the entire DeFi ecosystem that relies on Ethena's liquidity. 70% of Pendle's business, Aave's large deposits are all tied to Ethena. If USDe fails, it could trigger a liquidity crisis across the DeFi industry, not just stablecoin decoupling. More worrying is user behavior. Recursive lending cycles on Aave and Pendle amplify gains as well as risks. Users stake USDe to obtain sUSDe, tokenize sUSDe on Pendle to obtain PT tokens, and then use PT tokens to collateral and lend more USDe on Aave, and so on. This leverage multiplier gameplay is reminiscent of the CDO square structure in the 2008 financial crisis – lending more of the same financial product with one financial product collateral, creating recursive leverage that is difficult to close quickly. If the funding rate continues to be negative, USDe may face redemption pressure, leveraged positions may trigger margin calls, and protocols relying on USDe's lock-up may face large-scale capital outflows, and the destructuring process may be faster than any single protocol can handle. Where is the risk? Any high-yield strategy will eventually face the question: what happens if it stops working? For Ethena, there are several potential risks: Persistent Negative Funding Rates: If market sentiment remains bearish, Ethena needs to pay funding fees instead of collecting them. Their $60 million reserve fund provides a buffer, but not unlimited. Exchange Counterparty Risk: While Ethena uses over-the-counter custody for its spot assets, it still relies on major exchanges to maintain short positions. If the exchange goes bankrupt or hacked, Ethena may need to quickly migrate positions to temporarily break the delta-neutral hedge. Liquidation risk of leverage cycles: If USDe returns suddenly drop, recursive lending positions may become unprofitable, triggering a wave of deleveraging and causing selling pressure on USDe. Regulatory pressure: European regulators have forced Ethena to move from Germany to the BVI. As yield-bearing stablecoins attract more attention, they may face stricter compliance requirements or restrictions. Stablecoin wars Ethena marks a fundamental shift in stablecoin competition. In the past, competition revolved around stability, adoption, and regulatory compliance. USDC competes with USDT on transparency and regulation, while algorithmic stablecoins emphasize decentralization. USDe is a game-changer through yield. It is the first major stablecoin to offer double-digit returns to holders while remaining pegged to the US dollar. This puts pressure on traditional stablecoin issuers to pocket all the proceeds from Treasuries without sharing them with users. The market is responding. USDe's stablecoin market share has exceeded 4%, second only to USDC (25%) and USDT (58%). What's more, USDe has grown far faster than both: USDT has grown by 39.5%, USDC by 87%, and USDe by over 200% over the past 12 months. If the trend continues, the stablecoin market could undergo a fundamental reshape. Users will shift from yield-free stablecoins to yield-based alternatives, with traditional issuers either sharing in the revenue or watching market share erode. brief summary Despite the risks, Ethena's momentum shows no signs of slowing down. The protocol has just approved BNB as a collateral asset, and XRP and HYPE tokens have also reached the inclusion threshold. This expands their market from ETH and Bitcoin to a wider range of assets. The ultimate test is whether Ethena can maintain a profit advantage while managing systemic risk. If successful, they will create the first scalable, sustainable yield-bearing dollar in crypto history. If it fails, we will see another dangerous story of chasing high yields. In any case, USDe's feat of reaching $12 billion in 18 months is a testament to the fact that when innovation is combined with market demand, financial products can expand at an unimaginable rate.