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

The dust from the crust has returned to Hokkaido, Japan. The days are sunny and warm, but the nights are bitterly cold. This weather pattern causes severe snow conditions known as "crust dust." Beneath the seemingly beautiful and flawless snow lies ice and brittle snow. It is disgusting.

As the footsteps of winter giving way to spring quicken, I want to revisit the article "Dust on the Crust" published a year ago. In that article, I proposed how to create a fiat stablecoin that exists without relying on traditional banking systems, supported by human intervention. My idea was to combine the long and short positions of perpetual futures contracts of cryptocurrencies to create a synthetic fiat currency unit. I named it "Nakadollar" because I envisioned using the "perpetual" short futures contracts of Bitcoin and XBTUSD as a way to create a synthetic dollar. At the end of the article, I promised to do my best to support a credible team to bring this idea to fruition.

The changes over a year are indeed significant. Guy is the founder of Ethena. Before creating Ethena, Guy worked at a hedge fund valued at $60 billion, investing in specialized areas such as credit, private equity, and real estate. Guy discovered the problems with cryptocurrency during the DeFi summer of 2020, and from then on, he couldn't 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 initial idea. He aimed to create a synthetic dollar stablecoin using ETH instead of BTC. At least, that was the plan at the beginning.

The reason Guy chooses ETH is that the Ethereum network offers native yields. To provide security and handle transactions, Ethereum network validators pay a small amount of ETH for each block directly through the protocol. This is what I refer to as the ETH staking yield. Furthermore, since ETH is now a deflationary currency, there is a fundamental reason why ETH/USD forwards, futures, and perpetual swaps trade at a continuous premium compared to spot. 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 for spot ETH USD ( sUSDe ) is approximately >50%.

Without an executable team, even the best ideas are just talk. Guy named his synthetic dollar "Ethena" and has assembled a star team to quickly and safely launch the protocol. 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 Ethena staff do not take shortcuts and complete tasks excellently. Fast forward 12 months, the Ethena stablecoin USDe officially launched, and just 3 weeks after going live on the mainnet, the issuance has approached 1 billion ( with a TVL of 1 billion; 1 USDe = 1 dollar ).

Let me set aside the knee pads and candidly discuss the future of Ethena and stablecoins. I believe Ethena will surpass certain trading platforms to become the largest stablecoin. This prophecy will take many years to realize. However, I want to explain why certain trading platforms are the best and worst businesses in cryptocurrency. It is said to be the best because it may be the financial intermediary where every employee profits the most in traditional finance and cryptocurrency. It is said to be the worst because the existence of certain trading platforms is to please their poorer traditional financial bank partners. The jealousy of banks and the problems that certain trading platforms bring to the guardians of America's peaceful financial system could immediately bring disaster to certain trading platforms.

For all those misled FUDsters of a certain trading platform, I want to be clear. A certain trading platform is not a financial fraud and is not lying about its reserves. Moreover, I have great respect for those who founded and operate the certain trading platform. However, if I may say so, Ethena will disrupt the certain trading platform.

This article will be divided into two parts. First, I will explain why the Federal Reserve (, the U.S. Department of the Treasury, and large U.S. banks associated with politics want to destroy a certain trading platform. Second, I will delve into Ethena. I will briefly introduce how Ethena is built, how it maintains its peg to the U.S. 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 US dollars in the cryptocurrency ecosystem on-chain.

Note: Physically backed fiat stablecoins refer to coins issued by entities that hold fiat currency in bank accounts, such as certain trading platforms. Synthetic backed fiat stablecoins refer to coins issued by entities that hedge cryptocurrencies with short-term derivatives, such as Ethena.

Envy, jealousy, and hatred

A certain trading platform ) code: USDT( is the maximum stablecoin calculated based on the token circulation. 1 USDT = 1 dollar. USDT is sent between wallets on various public chains like Ethereum. To maintain the peg, the certain trading platform holds 1 dollar in a bank account for each circulating unit of USDT.

If there is no US dollar bank account, a trading platform cannot fulfill its functions of creating USDT, holding US dollars that support USDT, and redeeming USDT.

Create: Without a bank account, USDT cannot be created, as traders have no place to send their dollars.

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

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

![Arthur Hayes: Why Ethena is the Best Choice for Providing Synthetic Dollars in the Encryption Ecosystem on the Public Chain?])https://img-cdn.gateio.im/webp-social/moments-98fc8217feea874ce9dea26b55747255.webp(

Having a bank account is not enough to ensure success, as not all banks are equal. There are thousands of banks around the world that can accept dollar deposits, but only certain banks hold master accounts at the Federal Reserve. Any bank wishing to settle dollars through the Federal Reserve to fulfill its dollar 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 agency banking business operates.

There are three banks: Bank A and Bank B are headquartered 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 USD to Bank B. The flow of funds is 1000 USD 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 by adding Bank D, which is also a U.S. bank with a master account. Bank A will use Bank C as its correspondent bank, while Bank B will use Bank D as its correspondent bank. Now, what happens if Bank A wants to remit $1000 to Bank B? The flow of funds is that Bank C transfers $1000 from its account at the Federal Reserve to Bank D's account at the Federal Reserve. Bank D will then deposit the $1000 into Bank B's account.

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

I have been involved in cryptocurrency since 2013. Typically, the banks that hold fiat currency for cryptocurrency exchanges are not banks registered in the United States, which means they need to rely on a U.S. bank with a master account to handle fiat deposits and withdrawals. These smaller non-U.S. banks are eager for deposits and banking business from cryptocurrency companies, as they can charge high fees while not paying any interest on deposits. Globally, banks are usually eager to acquire cheap dollar funding since the dollar is the world's reserve currency. However, these smaller foreign banks must interact with their correspondent banks to process dollar deposits and withdrawals outside their locations. While correspondent banks tolerate these fiat flows related to cryptocurrency businesses, for whatever reason, sometimes certain cryptocurrency clients are excluded from 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. Banks that lose dollar liquidity become like zombies. Therefore, if the correspondent banks demand it, small banks will always abandon cryptocurrency clients.

When we analyze the strength of a trading platform's banking partners, the development of this agent bank business is crucial.

Banking partners of a certain trading platform:

• 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 primary account with the Federal Reserve. Cantor Fitzgerald is a primary dealer that helps the Federal Reserve conduct open market operations, such as buying and selling bonds. The ability of a trading platform to transfer and hold dollars is entirely subject to the whims of the agent banks. Given the size of a certain trading platform's U.S. Treasury bond portfolio, I believe their partnership with Cantor is crucial for continuing to enter this market.

If the CEOs of these banks did not negotiate for equity in a certain trading platform in exchange for banking services, then they are fools. When I later introduce the per capita income metrics of employees at that trading platform, you will understand the reasons behind it.

This covers the reasons why a certain trading platform's banking partners are performing poorly. Next, I would like to explain why the Federal Reserve dislikes the business model of a certain trading platform, and why fundamentally this is unrelated to encryption and is related to the way the US dollar money market operates.

Full Reserve Banking

From the perspective of traditional finance, a certain trading platform 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 remittance. It pays almost no interest on deposits because depositors face no risk. If all depositors simultaneously request to withdraw their money, the bank can immediately meet their demands. Therefore, it is called "full-reserve." In contrast, a fractional-reserve bank has a loan amount greater than its deposits. If all depositors simultaneously request a refund of their deposits from a fractional-reserve bank, the bank will collapse. Fractional-reserve banks pay interest to attract deposits, but depositors face risks.

A certain trading platform is essentially a full-reserve dollar bank that provides dollar trading services driven by public chains. That's it. No loans, no interesting stuff.

The Federal Reserve does not dislike full-reserve banks because of who their customers are, but because of how these banks handle their deposits. To understand why the Federal Reserve loathes the full-reserve banking model, I must discuss the mechanisms of quantitative easing ) QE ( and its effects.

Banks collapsed during the 2008 financial crisis because they did not have enough reserves to cover losses from bad mortgages. Reserves are the funds that banks hold 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 reserves. Great!

Quantitative easing has not caused rampant inflation in as obvious a way as the COVID stimulus checks did, because bank reserves are kept at the Federal Reserve. The COVID stimulus was given directly to the public for discretionary use. If banks lend out these reserves, 2008