Ethena: The best choice for providing synthetic USD in the on-chain encryption ecosystem.

The dust on the crust has returned to Hokkaido, Japan as scheduled. The days are warm like spring, while the nights are bone-chillingly cold. This kind of weather has led to severe snow conditions known as "crust dust." Beneath the seemingly beautiful and flawless snowfall lies ice and brittle snow.

As winter turns to spring, I want to revisit the article "Dust on the Crust" published a year ago. In the article, I proposed how to create a fiat stablecoin that exists without relying on the TradFi banking system and has human backing. My idea is to combine long and short positions in perpetual futures contracts of cryptocurrencies to create a synthetic fiat currency unit. I named it "Nakadollar" because I envision using Bitcoin and XBTUSD's "perpetual" short futures contracts as a way to create synthetic dollars.

The changes in a year are really significant. Guy is the founder of Ethena. Before creating Ethena, Guy worked at a hedge fund with a market value of $60 billion, investing in special fields such as credit, private equity, and real estate. In 2020, during the DeFi Summer, Guy discovered the Shitcoin problem, and since then, he has been unable to stop. 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 aims to create a synthetic dollar stablecoin using ETH instead of BTC.

The reason Guy chose ETH is that the Ethereum network offers native yields. To provide security and process transactions, Ethereum network validators directly pay a small amount of ETH for each block through the protocol. This is what I refer to as the ETH staking yield. Additionally, since ETH is now a deflationary currency, there is a fundamental reason for the continuous premium of ETH/USD forwards, futures, and perpetual swaps compared to spot trading. 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 on spot ETH dollars (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, Maelstrom became a founding advisor, and in exchange, we received governance tokens. In the past, I have worked with many high-quality teams, and the staff at Ethena do not take detours and excel at completing tasks. Fast forward 12 months, and Ethena's stablecoin USDe officially launched, with a supply nearing 1 billion units ( and a TVL of $1 billion; 1 USDe = 1 dollar ).

Let me put aside the knee pads and discuss frankly the future of Ethena and stablecoins. I believe Ethena will surpass Tether to become the largest stablecoin. This prediction will take many years to realize. However, I would like to explain why Tether is both the best and worst business in cryptocurrency. It is said to be the best because it may be the financial intermediary that profits the most for every employee in TradFi and cryptocurrency. It is deemed the worst because Tether exists to please its poorer TradFi banking partners. The jealousy of banks and the problems Tether brings to the guardians of the peaceful financial system in the U.S. could immediately spell disaster for Tether.

To all those misguided Tether FUDsters, I want to make it clear. Tether is not a financial fraud, nor has it lied about its reserves. Furthermore, 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 US Treasury, and large American banks with political connections want to destroy Tether. Secondly, I will delve into Ethena. I will briefly introduce how Ethena is constructed, how it maintains its peg to the US 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: Physically-backed fiat stablecoins refer to coins whose issuers hold fiat currency in bank accounts, such as Tether, Circle, First Digital ) cough cough...... certain trading platforms (, etc. Synthetic-backed fiat stablecoins refer to coins that are collateralized by cryptocurrencies held by the issuer and short-term derivatives, such as Ethena.

![Arthur Hayes: Why is Ethena the best choice for providing synthetic dollars in the encryption ecosystem on-chain?])https://img-cdn.gateio.im/webp-social/moments-ef15ce87ed8073022077a868ae41ac41.webp(

Envy, jealousy, hatred

Tether) code: USDT( is the largest stablecoin calculated based on the 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.

Without a US dollar bank account, Tether cannot perform its functions of creating USDT, holding the US dollars that support USDT, and redeeming USDT.

Creation: Without a bank account, it is impossible to create USDT, as traders have no place to send their dollars.

Dollar Custody: If there is no bank account, there is nowhere to store the dollars that support USDT.

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

Having a bank account is not enough to ensure success, as not all banks are equal. There are thousands of banks worldwide that can accept USD deposits, but only certain banks hold master accounts at the Federal Reserve. Any bank wishing to settle USD transactions through the Federal Reserve to fulfill its USD agency obligations must hold a master account. The Federal Reserve has complete discretion over which banks can obtain a master account.

I will briefly explain how the proxy banking business operates.

There are three banks: Bank A and Bank B have their headquarters in two non-U.S. jurisdictions. Bank C is a U.S. bank that has 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 correspondent bank. Bank C assesses the customer base of both banks and approves them.

Bank A needs to remit 1000 dollars to Bank B. The flow of funds is 1000 dollars transferred 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 appoints Bank C as the agent bank, while Bank B appoints Bank D as the agent bank. Now, if Bank A wants to remit $1000 to Bank B, what will happen? The flow of funds is that Bank C transfers $1000 from its account at the Federal Reserve to the account of Bank D at the Federal Reserve. Finally, Bank D deposits the $1000 into Bank B's account.

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

I started getting involved in cryptocurrency in 2013. Typically, the banks that hold fiat currency for cryptocurrency exchanges are not registered banks in the United States, which means they rely on a U.S. bank with a master account to process 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 usually eager to obtain cheap dollar funding, as the dollar is the world's 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 these fiat flows associated with cryptocurrency businesses, for whatever reason, sometimes certain cryptocurrency clients may be dropped by small banks at the request of the correspondent banks. If small banks do not comply with regulations, they risk losing their correspondent banking relationships and their ability to transfer dollars internationally. A bank that loses dollar liquidity is like a zombie. Therefore, if the correspondent bank requests, small banks will always drop 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 dollars is entirely subject to the whims of the intermediary banks. Considering the size of Tether's U.S. Treasury portfolio, I believe their partnership with Cantor is crucial for continuing to access this market.

If the CEOs of these banks did not negotiate to obtain equity in Tether in exchange for banking services, then they are fools. When I later introduce the per capita income metrics of Tether's employees, you will understand the reasons behind it.

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

Full Reserve Banking

From the perspective of TradFi, 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 remittances. It pays almost no interest on deposits because depositors face no risk. If all depositors demand to withdraw their money at the same time, the bank can immediately meet their requests. Therefore, it is called "full reserve." In contrast, the loans of partial-reserve banks exceed their deposits. If all depositors simultaneously request withdrawals from a partial-reserve bank, the bank will collapse. Partial-reserve banks pay interest to attract deposits, but depositors face risks.

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

The Federal Reserve dislikes full-reserve banks not because of who their customers are, but 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 and impacts of quantitative easing ) QE (.

Banks failed during the 2008 financial crisis because they did not have enough reserves to cover losses from bad mortgages. Reserves are the funds that banks keep 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 goal by implementing QE.

QE is the process by which the Federal Reserve purchases 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 has not caused crazy inflation in an obvious way like the COVID stimulus checks because bank reserves remain at the Federal Reserve. The COVID stimulus measures were given directly to the public for discretionary use. If banks lend out these reserves, the inflation rate would immediately rise after 2008 because 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 keeping them at the Federal Reserve. The Federal Reserve faces a problem. How do they ensure that the banking system has nearly unlimited reserves while not causing inflation? The Federal Reserve chooses to "bribe" the banking industry rather than lend.

Bribing banks to ask the Federal Reserve for excess reserves in the banking system.