Ethena Labs Raises $14M for Synthetic Dollar Project

Ethena Labs, a startup specializing in Ethereum-based financial instruments tied to the U.S. dollar, has received $14 million in funding. The funding was disclosed by Ethena’s team on February 16 and is backed by venture capital firm Dragonfly, along with other investors. This comes after a previous round of investment in 2023 which landed the startup $6 million from various investors. Ethena’s product, called USDe, is a synthetic dollar backed by delta-hedging strategies using staked Ether as collateral. Since its launch in December, USDe has amassed $200 million in total value locked, according to DefiLlama data.

USDe, through a combination of financial derivatives such as arbitrage and perpetual swaps contracts, maintains its peg to the U.S. dollar. Unlike typical stablecoins that use direct collateral or algorithmic methods to maintain their value, USDe uses hedging strategies to ensure that the value of the digital currency remains constant with the dollar. Ethena Labs CEO Guy Young considers stablecoins to be the most important instrument in the cryptocurrency industry, with more than $130 billion in global demand. He also notes the success of stablecoin issuer Tether Holdings Limited, which posted a record-breaking net profit in the last quarter, largely due to yields from its reserves.

While delta-hedging provides stability, it does not eliminate risks entirely. Liquidity and counterparty risks still exist, especially during periods of market stress and unexpected events. To mitigate these risks, Ethena claims to have collaterals held and settled by institutional-grade firms like Fireblocks, Copper, and Bitgo. The startup aims to provide a crypto-native alternative to centralized stablecoins with collateral backing residing within the banking system.

Investors are enthusiastic about Ethena Labs and its USDe product. Tom Schmidt, a general partner at Dragonfly, calls it the “holy grail of crypto dollars” and highlights the popularity of stablecoins in providing access to USD-denominated savings and remittances worldwide. Schmidt believes that USDe addresses three common issues with stablecoins: stability, censorship, and capital efficiency.

Ethena Labs has secured significant funding for its Ethereum-based synthetic dollar product, USDe. With its unique approach to maintaining the peg to the U.S. dollar and the support of institutional-grade firms, Ethena aims to provide a promising alternative to existing stablecoins in the market.