This episode reveals Ethena's strategy to bridge traditional finance capital with DeFi's high-yield opportunities, positioning itself not just as a stablecoin but as a core financial infrastructure for the next market cycle.
Ethena's Parabolic Growth Analysis
- Guy Young, founder of Ethena, attributes the protocol's explosive growth to a combination of luck and relentless execution. Launching in March 2024 when crypto funding rates were exceptionally high (50-60% annualized) provided a powerful tailwind, making USDe's yield highly attractive. Young emphasizes that this market timing was crucial.
- He also credits the team's "day one" urgency and aggressive mindset, which has allowed them to maintain momentum even after achieving significant scale. This combination of favorable market conditions and a highly motivated team drove USDe to become the fastest stablecoin to reach a $12 billion market cap and Ethena to cross $500 million in cumulative gross revenue.
Ethena's Business Model and Future Projections
- Ethena's core business remains driven by the USDe stablecoin, which generated an 18% APY in 2024. Young explains that due to this high yield, Ethena doesn't need to reach the scale of Tether or Circle to generate comparable cash flow. With USDe at nearly $13 billion and an annualized gross interest income of around 10%, the protocol is already producing over $1.3 billion in gross revenue before the protocol's take rate.
- Young projects the stablecoin market will grow to $2-3 trillion in the next few years, with yield-bearing assets growing fastest. He sets a target for Ethena to reach $30-50 billion in supply, prioritizing market dominance over maximizing short-term revenue capture.
- Strategic Insight: Young's focus on growth over immediate profit capture is a key strategic decision. He argues against premature value extraction like buybacks, stating, "the market opportunity to go and become a bigger business than Circle is a far more interesting one than kind of capturing a bit more at this stage."
Solving the VC Unlock Problem with Digital Asset Treasuries (DATs)
- Young candidly discusses early fundraising mistakes, admitting he raised too much capital at too low a valuation during the bear market. This created a structural challenge common to many crypto projects: a massive overhang of VC tokens set to unlock with insufficient liquid market capital to absorb them. He notes the total liquid altcoin fund capital is only around $10-15 billion, not enough to support the emission schedules of major projects.
- The solution emerged by connecting the crypto supply problem with demand from traditional finance (TradFi) for stablecoin exposure. This led to the creation of Digital Asset Treasuries (DATs), which provide a vehicle for TradFi capital to invest in crypto assets in a familiar format.
- DAT (Digital Asset Treasury): A publicly traded investment vehicle that holds digital assets. It allows traditional investors to gain exposure to crypto through regulated stock exchanges, bridging the gap between TradFi and on-chain markets.
Fundraising Advice for Crypto Founders
- Be surgical with dilution: He advises selling no more than 15% of a project's total supply in early rounds to avoid future tokenomic pressure.
- Vet your investors' DNA: Young warns against partnering with firms that act like hedge funds seeking a quick flip rather than long-term venture partners. He notes that the best VCs provide patient capital, which is crucial for a project's long-term health.
The Mechanics of Ethena's Second DAT Raise
- Ethena recently completed a second, larger DAT raise, structured similarly to the first. The vehicle, managed by Stablecoin X, sells locked tokens to investors, and the proceeds are used to buy ENA tokens on the open market. This structure was well-received because the foundation actively supports the token price alongside new investors, unlike typical raises where funds go into a foundation's treasury.
- Young highlights that they chose a SPAC (Special Purpose Acquisition Company) structure, which has a longer time-to-liquidity (3-4 months) compared to other vehicles. This was a deliberate choice to build a more robust, long-term structure, avoiding shortcuts that he believes are now showing "cracks" in the market.
- SPAC (Special Purpose Acquisition Company): A publicly-traded shell company created to raise capital for the purpose of acquiring an existing private company, thereby taking it public.
The Future of DATs and the TradFi-to-DeFi Carry Trade
- Young is skeptical about the long-term viability of many DATs, especially those that are simple wrappers for a single token. He believes most will eventually trade below their NAV (Net Asset Value). For Ethena, however, the DAT is primarily a distribution play to access deep pools of TradFi capital.
- He outlines a powerful future use case: a TradFi-to-DeFi carry trade. A DAT could raise debt at low rates (e.g., 5-6%) in traditional markets and deploy that capital into higher-yielding on-chain products like USDe (e.g., 10%).
- Actionable Insight: This carry trade represents a significant, scalable bridge for capital to flow from TradFi into DeFi. Investors and researchers should monitor the development of these structures, as they could dramatically increase TVL in protocols that facilitate leverage and yield, such as Aave, Spark, and Ethena itself.
The Ethena, Aave, and Pendle DeFi Flywheel
- The conversation highlights the powerful symbiotic relationship between Ethena, Aave, and Pendle as a prime example of DeFi Money Legos. This dynamic is driven by an interest rate arbitrage between DeFi and CeFi.
- Aave provides cheap leverage, allowing users to borrow stablecoins at a lower rate than the yield offered by Ethena's USDe.
- Pendle allows users to fix the volatile floating yield of USDe, making the leveraged carry trade more predictable and attractive.
- Ethena provides the high-yield underlying asset (USDe) that fuels the entire strategy.
- This composability has created a flywheel effect, where growth in one protocol directly benefits the others. Ethena assets now comprise over 70% of Pendle's $10 billion TVL, and liquid leverage on Aave has grown to $2 billion.
- DeFi Money Legos: A term describing the composable nature of decentralized finance protocols, where different applications can be seamlessly combined like building blocks to create novel financial products and services.
Partnership Strategy: The Power Law of BD
- Young reveals that Ethena's business development strategy follows a power law, where 95% of its USDe balances are driven by just three to five key partnerships across DeFi, CeFi, and TradFi. He advises founders to be surgical and focus intensely on the few relationships that can move the needle at scale, rather than getting distracted by trying to be "everything to everyone." This focused approach is critical for a product like USDe, which relies on distribution through other platforms.
Navigating the Stablecoin Competitive Landscape
- Young positions Ethena distinctly from Tether and Circle. He views Tether as a partner, noting that Ethena is one of the world's top 5-10 holders of USDT at any given time to facilitate its hedging operations. Ethena's product is also fundamentally different, as it shares yield with users.
- He sees Circle as a more direct competitor, especially as Circle begins to share more of its T-bill yield with users on platforms like Coinbase. However, Young identifies a key differentiator: Ethena's yield is counter-cyclical to traditional interest rates. When central bank rates fall, crypto leverage demand and funding rates tend to rise, making USDe more attractive while Circle's business model is challenged.
Ethena's Operational Efficiency and On-Chain Business Models
- Ethena operates with a lean team of just 27 people, a stark contrast to Circle's roughly 600 employees. Young argues this demonstrates the power of on-chain business models, which can scale non-linearly without a proportional increase in operational costs.
- Quote: "It's like the first time that finance can actually scale at the cost of software. You get outcomes like this... where you've got you know 10, 20 people sitting in there and they're generating billions of dollars without needing more people to sort of get there."
- This efficiency allows Ethena to target a net profit margin of 50-70%, positioning it between Circle's (~10%) and Tether's (~85%).
The Future of Perpetual Swaps and Ethena's Expansion
- Ethena's growth is currently constrained by the size of the crypto perpetual swaps (perps) market, where it constitutes about 9% of the open interest. Young is incredibly bullish on the expansion of this market, particularly into equities. He believes equity perps will attract hundreds of billions in open interest over the next three years, as they offer a superior form factor for retail leverage compared to options.
- Strategic Implication: The emergence of equity perps would massively expand the total addressable market for Ethena's delta-neutral strategy. This is a critical trend for investors to watch, as it could unlock the next phase of Ethena's growth beyond crypto-native assets.
Institutional Strategy: The Launch of IUSDe
- Ethena is preparing to launch IUSDe, a permissioned, KYC-compliant version of USDe designed for institutional investors. The product will use a Special Purpose Vehicle (SPV) structure, allowing funds like asset managers and credit funds to offer their LPs exposure to USDe's yield in a regulated format. Young predicts that within two to three years, more than 50% of Ethena's total supply could be held in institutional products like IUSDe, signaling a massive potential inflow from traditional finance.
Analysis of New Market Entrants: Hyperliquid and Stripe
- Hyperliquid: Young sees Hyperliquid's plan to launch a native stablecoin as a healthy competitive development. He notes that Hyperliquid currently generates around $220 million in revenue for Circle from the USDC held on its platform, and a native stablecoin could help the protocol capture some of that value. Ethena may compete to become the provider for this stablecoin.
- Stripe's Tempo Chain: Young is "extremely bullish" on Stripe's new chain, viewing it as the legitimate realization of what projects like XRP or Libra aimed to be. He believes the combination of Stripe's real-world payments expertise and Paradigm's crypto-native knowledge is a powerful formula for success.
Ethena's Regulatory and Product Strategy
- Ethena employs a dual-track strategy to navigate the global regulatory landscape.
- USDe: Positioned as an offshore product for crypto-native use cases like trading collateral and DeFi savings.
- USDTB: A separate, US-compliant product developed with Anchorage. It is designed to be a clean payment stablecoin under potential US regulations, competing with offerings from Franklin Templeton and WisdomTree.
- Young believes the primary growth and profit opportunity remains offshore, following Tether's successful strategy of avoiding direct competition within the highly regulated U.S. market.
Conclusion
This episode underscores Ethena's evolution from a high-yield stablecoin to a sophisticated financial primitive bridging DeFi and TradFi. Investors and researchers should monitor the rollout of its institutional product (IUSDe), its moves to capitalize on the emerging equity perps market, and the development of DAT-driven carry trades.
