Exclusive: Ethereum-backed stablecoin developer Ethena raises $6M

Crypto startup Ethena, which is developing a new stablecoin secured by ethereum derivatives, raised $6 million in seed funding led by Dragonfly, the company tells Axios exclusively.

Why it matters: Developed in response to Terra's failure, the new stablecoin has a novel approach to maintaining its dollar peg.

How it works: Ethena has developed a stablecoin, USDe, that maintains its dollar peg by using collateral from users to hedge price exposure by shorting ethereum using perpetual swaps.

• By holding equal amounts of staked ETH and perpetual swaps, it ensures that any gains or losses by either asset are essentially canceled out.
• It is developing a digitally native, USD-denominated Internet savings bond that generates yield from a combination of staked ETH and swap margins.

State of play: Ethena hopes to differentiate itself from previous attempts at building an algorithmic stablecoin — like Terra, which collapsed soon after it got knocked off its dollar peg last year.

• It also differs from current stablecoin leaders USDC and USDT, which are mostly backed by fiat-based assets like Treasuries.
• That approach is seen by most investors as safer, but it still relies on the traditional banking system to function.

What they're saying: "In crypto, you're trying to create a parallel financial system, but the most important financial instrument in the entire space (the stablecoin) is still completely tethered to the existing system," Ethena founder Guy Young says.

• "We're trying to create something that exists outside of the banking system."

Of note: Ethena's financing includes backing from crypto derivatives exchanges like Deribit, Bybit, OKX, Gemini and Huobi.

• It is also supported by BitMEX founder Arthur Hayes and his family office — which is notable because Hayes himself has called for the creation of an algorithmic stablecoin (NakaDollar, or NUSD) backed by bitcoin derivates.

Between the lines: Young says he drew inspiration for the creation of USDe from a piece Hayes wrote in the wake of the Terra collapse which described how a crypto derivative-backed stablecoin might work.

What's next: The company hopes to fully launch its stablecoin and bond asset in the coming months after completing the testnet phase in the third quarter.