Ethena Labs, the team behind USDe, has added Bitcoin ( BTC ) as collateral to its synthetic dollar-pegged product with the hopes of scaling “significantly” from its current $2-billion supply. 

With Bitcoin open interest increasing from $10 billion to $25 million over the past year on major cryptocurrency exchanges, USDe has the capacity to scale by a factor of 2.5, Ethena explained in an April 4 post on X.

USDe went live on Ethereum on Feb. 19. At the time, Ethena promised a 27.6% annual percentage yield (APY) on staked USDe, prompting widespread concerns in the community. USDe’s APY topped out at 113% on March 5 but has since fallen to 7.15%.

Excited to announce that Ethena has onboarded BTC as a backing asset to USDe

This is a crucial unlock which will enable USDe to scale significantly from the current $2bn supply pic.twitter.com/FOZRWBrVZV

— Ethena Labs (@ethena_labs) April 4, 2024

Ethena said Bitcoin would provide better liquidity and offer a more “safe” and “robust” product for USDe token holders.

“BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity for delta hedging.”
Ethena Labs adds Bitcoin backing to its USDe synthetic dollar image 0 Source: Ethena Labs

Ethena adopts a delta hedging strategy in the derivatives market to maintain USDe’s peg.

For example, Ethena may have short positions in Ether ( ETH ) or Ether-based derivatives, which become rewarding when Ether’s price falls. As a result, Ethena can offset any downward volatility from USDe’s collateral to a considerable degree.

Prior to the Bitcoin addition, USDe was backed by ETH, Tether ( USDT ) and Ether-based liquid staking tokens in proportions of 45%, 38% and 17%, respectively.

The firm sources the bulk of its collateral from Binance, Bybit and OKX in 59%, 15% and 20% proportions, respectively. Deribit, Bitget and BitMEX make up the remaining 6%.

Ethena acknowledged that Bitcoin doesn’t possess a native staking yield like staked Ether but said staking yields of 3%–4% are “less significant” during bull markets where funding rates can exceed 30%.

Related: Ethena will become highest revenue-generating crypto project — Delphi Labs CEO

Ethena is trying to differentiate its synthetic dollar product from stablecoins by eliminating or significantly reducing reliance on the traditional banking system.

USDe currently boasts the fifth-highest market capitalization among United States dollar-denominated products, according to CoinGecko.

Its $2-billion market cap only trails USDT, USD Coin ( USDC ), Dai ( DAI ) and First Digital USD (FDUSD).

Magazine: Unstablecoins: Depegging, bank runs and other risks loom