What Is Ethena and How Does It Work?

DeFi has a lot of “stablecoins,” but most of them fall into two buckets:

• Fiat-backed: USDC, USDT – dollars (or T-bills) in a bank somewhere
• Crypto-collateralized: DAI-style – overcollateralized loans backed by on-chain assets

Ethena is trying something different.

It’s a synthetic-dollar protocol built on Ethereum that aims to create a crypto-native form of “money” that doesn’t depend on banks at all, while still behaving like a dollar in practice.

The core pieces are:

• USDe – a delta-hedged synthetic dollar
• sUSDe – a staked version of USDe that earns yield
• ENA – Ethena’s governance and ecosystem token

Let’s break down what Ethena actually does, how USDe and sUSDe work, how you can get involved, and how this is different from a typical stablecoin or yield product.

USDe: A Synthetic Dollar Backed by Crypto + Hedges

USDe is Ethena’s flagship asset: a token designed to track $1 without keeping dollars in a bank. Instead, it uses delta-neutral hedging on top of crypto collateral.

How USDe Is Backed

Ethena’s backing looks roughly like this:

• The protocol holds crypto collateral – primarily ETH and liquid staking tokens like stETH (and in practice, BTC or other blue-chip assets via custodians).
• For every unit of “long” exposure it takes (e.g., 1 ETH), it opens an equivalent short position in perpetual futures on major exchanges.

The idea is to keep the portfolio “delta-neutral”:

• If ETH goes up, the collateral is worth more, but the short perp loses – gains and losses offset.
• If ETH goes down, the collateral loses value, but the short position gains.

As long as the hedge is sized correctly, the USD value of the combined position stays relatively stable, even though it’s all crypto under the hood.

Ethena’s docs describe this as a delta-hedged synthetic USD portfolio: instead of relying on a bank balance, USDe is backed by hedged positions on liquid crypto assets and derivatives.

How the Peg Is Maintained

USDe maintains its peg using:

• Delta-neutral hedging (as above)
• Treasury management that resizes the hedge when users mint or redeem USDe
• A hedging system (off-chain services) that monitors prices, risk and backing in real-time and adjusts positions across exchanges and custodians

Ethena does not rely on material leverage to maintain the hedge beyond whatever margin requirements exchanges impose, which is a key design choice to avoid blow-ups from over-levering the short positions.

In practice, USDe has grown into one of the largest “stable-like” assets in crypto, backed by this hedged book instead of bank deposits.

sUSDe: Turn USDe Into a Yield-Bearing Synthetic Dollar

If USDe is the “cash” layer, sUSDe is the “yield-bearing savings account” on top.

When you stake USDe in Ethena, you receive sUSDe. Over time, the value of each sUSDe increases versus USDe as yield is distributed.

Where the Yield Comes From

Ethena’s protocol revenue – and therefore sUSDe’s yield – comes from three main sources:

1. Staking rewards on backing assets
   • A large portion of the collateral is in staked ETH (e.g. stETH, other LSTs), which earns staking rewards.
2. Funding & basis from derivatives hedges
   • Because Ethena is short perpetual futures and similar instruments, it often earns the funding rate and basis spread when the market is net long.
   • Historically, ETH perp funding has been positive on average, although volatile year to year.
3. Fixed rewards on liquid stables
   • Ethena also holds some reserves in stables like USDC, USDT, USDtb in custodial accounts and can earn fixed rewards (e.g. Coinbase’s USDC rewards program).

The protocol aggregates these revenues and passes them through to sUSDe holders, typically smoothing payouts over time so yield is not ultra-spiky.

Variable Yield (And Sometimes Zero)

Yield is not guaranteed:

• If perp funding turns negative and the cost of hedging outweighs staking rewards, there may be periods where no rewards are paid to stakers.
• Ethena maintains a reserve fund that can support the backing when funding is weak, but it doesn’t magically create yield; it’s risk capital for the protocol.

So sUSDe is best thought of as exposure to Ethena’s delta-hedged yield engine: a blend of staking income, derivatives funding, and stablecoin yields, minus costs and risk.

ENA: Ethena’s Governance & Ecosystem Token

The third pillar is ENA, Ethena’s governance and utility token.

• Total supply is 15 billion ENA.
• The token launched in April 2024 via a major airdrop tied to the Shard Campaign, a points program rewarding early USDe users and LPs.

What ENA Does

ENA is used for:

• Governance
  • ENA holders can vote on protocol parameters, upgrades, and risk framework.
  • Governance helps elect members of Ethena’s Risk Committee, which oversees critical safety and hedging decisions.
• Fee switch / value capture
  • Ethena has a “fee switch” design where governance can decide how much protocol revenue gets directed to ENA holders vs. reserves or growth.
• Incentives
  • ENA is used to bootstrap liquidity, reward integrations, and align partners – often layered on top of USDe/sUSDe incentives and points campaigns (Shards, then Sats).

Holding ENA is effectively taking a leveraged bet on Ethena’s success and risk management, not the same thing as holding USDe or sUSDe.

How Users Can Get Involved

There are three main ways DeFi users typically interact with Ethena:

1. Use USDe as a Synthetic Dollar

• Mint USDe via Ethena if you have eligible collateral and access (otherwise, you can buy it on CEXs/DEXs).
• Hold USDe as a stable, crypto-native unit of account that doesn’t rely on bank deposits.
• Use USDe across DeFi: LP pools, money markets, structured products, or as collateral where supported.

This is the “cash” leg of the Ethena ecosystem.

2. Stake into sUSDe for Yield

• Stake USDe → receive sUSDe in the Ethena app or through supporting integrations.
• sUSDe gives you exposure to:
  • ETH staking rewards on backing
  • perp funding & basis
  • stablecoin yields in the treasury

sUSDe is the yield-bearing synthetic dollar and is widely used in DeFi strategies, Pendle markets, lending protocols, and yield aggregators.

3. Hold or Govern with ENA

• Acquire ENA if you want exposure to the protocol itself:
  • Participate in governance
  • Potentially share in protocol revenue as fee-switch decisions evolve
• ENA’s value is tied to USDe adoption, sUSDe yield sustainability, and Ethena’s risk track record, not to a peg.

ENA is more speculative and governance-oriented; USDe and sUSDe are “money/return” primitives.

How Ethena Is Different from Typical Stablecoins & Yield Products

Ethena doesn’t fit neatly into existing buckets, which is why people argue over whether USDe should even be called a “stablecoin.” Some analysts describe it more precisely as a tokenized delta-hedged strategy that happens to target $1.

Here’s what makes it stand out:

No Bank Reserves

Unlike USDC/USDT:

• USDe is not backed by cash or T-bills in a bank account.
• Its backing is a hedged crypto derivatives portfolio, with custodial and on-chain components monitored in real time.

That makes it more crypto-native, but also exposes it to exchange risk, derivatives market risk, and smart contract risk rather than banking risk.

Built-In Yield Engine

USDe by itself is just the synthetic dollar; sUSDe sits on top as the yield-bearing version.

• Yield is generated via staking, perp funding, and stablecoin rewards, rather than purely from on-chain lending spreads like Aave/Compound.
• That yield is variable and market-dependent, and can drop to zero or near-zero in stressed funding environments.

This makes sUSDe closer to an on-chain hedge fund share class than a simple savings account, even though the UX is “stake and earn.”

Delta-Neutral Design

By delta-hedging its backing, Ethena tries to:

• Keep USDe’s USD value stable
• Offload price risk of ETH/BTC onto derivatives exchanges
• Still capture the carry (staking yield + funding) that would normally go to a sophisticated trading desk

For end users, that means:

You get exposure to a strategy that would be difficult or impossible to run yourself (collateral management + multi-venue hedging + risk controls), wrapped into a simple synthetic dollar + staked version.

Key Risks to Understand

The Ethena design is clever, but not magic. Main risk buckets include:

• Exchange & counterparty risk
  • Hedging relies on centralized derivatives venues; failure, hacks or extreme dislocations could impair backing or hedging.
• Smart contract & oracle risk
  • Ethena’s contracts, integrations, and price feeds can have bugs or be attacked.
• Funding & basis risk
  • If perpetual funding goes sharply negative for extended periods, yield disappears and backing can be stressed.
• Liquidity & peg risk
  • In volatile markets, USDe’s peg could deviate, especially if hedges can’t be adjusted or liquidity dries up.

Ethena’s docs and third-party research are very explicit about these; if you’re using USDe/sUSDe with real size, it’s worth reading the risk sections end-to-end.

The Bottom Line

Ethena is best thought of as:

A synthetic-dollar protocol that turns a complex, delta-hedged crypto strategy into two simple primitives – USDe (a dollar-tracking token) and sUSDe (its yield-bearing staked form) – governed and scaled by the ENA token.

For DeFi users, that unlocks:

• A bankless, crypto-native “dollar” (USDe)
• A highly financialized, yield-bearing stable-like asset (sUSDe)
• Governance and upside exposure via ENA

Just remember that under the calm, $1-ish surface is a fairly sophisticated derivatives machine. If you treat it like “just another stablecoin” without understanding that, you’re missing the whole point – and the whole risk profile – of what Ethena is actually doing.

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Disclaimer: The content of this blog is for informational purposes only. It is not investment advice. Please do your own research and consult with a qualified financial advisor before making any investment decisions. DeFi investments carry significant risks, and past performance does not guarantee future results. More details here.