GM, this is your Daily Bolt briefing
In today’s edition, we’re exploring Ethena Labs, a protocol building out Infrastructure for a stablecoin, money markets, and a bond using Ethereum. Hear Synthetix Founder Kain Warwick’s critiques and learn how the project plans to integrate with Synthetix V3 in the future.
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1/ Synthetix Twitter Spaces with Ethena Labs
Preview: Westie hosts Kain, Afif, Conor, and Young to discuss Ethena’s new decentralized stablecoin, USDe, and more! Click here to listen to the full episode (54 mins).
Read our Note (6 mins) and save 48 mins.
Synthetix is a decentralized liquidity provisioning protocol built on Ethereum and Optimistic Ethereum.
Ethena Labs is building Infrastructure to unlock the potential of staked Ethereum involving their delta-neutral stablecoin and Internet bonds.
1/ Ethena: A Scalable, Semi-Decentralized Stablecoin
Young shares the background story of Ethena, where they noticed a gap in the stablecoin landscape. He explains their concept of a scalable, trustless stablecoin that isn't perfectly decentralized but aims to operate outside of centralized exchanges.
Young talks about Ethena's mechanism for collateralization and stability, highlighting the need for centralized liquidity to achieve scalability.
Westie points out the 'stablecoin trilemma' of having to choose between scalability, decentralization, and stability. He asks Young's opinion on where Ethena fits within this trilemma.
Young says that Ethena strives for a balance between the three, focusing particularly on transparency and censorship resistance.
Kain mentions his initial skepticism about Ethena's semi-decentralized approach but subsequently sees the value in compromise for the sake of scaling and competing with centralized finance.
Westie asks how USDe handles negative funding rates. Young explains that over the past three years, they've noticed a resilient funding rate of 5 to 7.5% paid from longs to shorts. During periods of industry instability, as in 2022, they found no quarter in which staked ETH yields couldn't cover the negative funding. This consistency and resilience give them confidence in their system's stability.
Young mentions that there's an insurance fund backing the stablecoin, acting as another line of defense. If all three lines of defense were to fail, the principal balance of the stablecoin would be used to pay down the fund's negative funding.
Young says that if the funding rate turns negative, users would likely start to withdraw from the product. As users withdraw and the shorts across different venues are lifted, the funding could return to positive. He sees this negative-to-positive cycle as a desirable part of the mechanism design, as it incentivizes users to move in and out of the stablecoin, promoting a healthier state.
He doesn't perceive the funding rate as a significant risk, considering both the historical data and the functionality of the mechanism design.
Westie mentions that it's beneficial for a stablecoin to have a self-correcting mechanism that allows the supply to contract during negative funding, which is a characteristic lacking in past decentralized stablecoins like UST.
Young agrees and describes this phenomenon as "anti-reflexivity". He thinks this mechanism allows for a better balance in demand growth and supply contraction, making it an improvement over previous designs.
Westie asks about the future of decentralized stablecoins, referencing a tweet from Kain about entering a "golden age" of decentralized stablecoins.
Kain says that the emergence of Delta-neutral stablecoins, which can balance scalability and decentralization, is a promising development. He thinks this type of stablecoin design could lead to a more exciting time for decentralized stablecoins.
Westie asks how important pure decentralization is for a stablecoin.
Kain says that although decentralization is a good quality for stablecoins, the amount required for them to be useful can differ. He says that even stablecoins with a small degree of decentralization can be very beneficial. He says that as a stablecoin's level of decentralization increases without losing any features, it becomes a more valuable asset.
Young adds that the level of importance placed on decentralization depends on who you ask. He says that narrower pieces of decentralization can be incredibly valuable to some people within the crypto space.
Kain says that people might not care about decentralization as long as most of the activities are happening in a database. He says that the trend could reverse with the increase in on-chain trading.
Westie asks about the utility of stablecoins and the differences between centralized and decentralized coins.
Young says that the appeal of stake-delegated yield on-chain will eventually decrease as real-world rates lower. He expects that products tied to Liquidity Staking Tokens (LSTs) will look more attractive in such a scenario.
Westie asks about the future role of stablecoins. Young says stablecoins will remain significant as long as the relative yields of crypto versus the real world keep changing. They believe stablecoins could play a key role in connecting DeFi and FinTech.
Kain supports the idea of stablecoins as payment technology. He thinks that if transaction costs and scaling issues are addressed, stablecoins could form a closed loop where they can be used throughout an ecosystem. He recognizes the difficulty in implementing stablecoins for end-user payments due to issues like chargebacks.
Synthetix V3 Integration and DeFi Prospects
Westie asks about Ethena’s plans to integrate Synthetix V3 and Synthetix Perps.
Young outlines three ways they see themselves working with Synthetix.
Firstly, trading on Synthetix and providing liquidity.
Secondly, integrating margining in instruments on decentralized and centralized exchanges. The idea is to utilize an asset with an embedded yield, such as USDe, as a margin instrument, allowing trading while capturing yield.
Lastly, they're excited about the idea of Synthetix V3 permissionless pools where they could potentially be using their product with an embedded yield. They see this as a valuable reserve asset for Synthetix and a scaling solution for sUSD.
Afif explains that Synthetix is one of the only on-chain perps designed around a specific use case. He highlights the funding rate mechanism, which works like an auction, adjusting until it finds someone to take the other side, ensuring stable markets.
Kain says that while he is open to the idea of adding USDe as collateral, he prefers assets that are purely decentralized. He mentions the new flexibility offered by Synthetix V3 for adding collateral and siloing markets.
Young says that Ethena has a lot of work to do to prove their concept before USDe could be considered for collateral.
Kain says that if required to add a centralized stablecoin as collateral, he would prefer a stablecoin with Ethena's design due to the mitigation of some centralization risks.
Westie asks if Ethena envisions USDe as a reserve asset within DeFi. Young says that they aim to create a reserve asset that is more decentralized and able to produce potential yield.
Young says that Ethena is finalizing internal tests and plans to open a white-listed testnet in around six weeks (date of interview: August 2nd, 2023). The timeline for the Synthetix integration with Ethena is yet to be announced.
Kain suggests that Infinex could take any stablecoin someone wants to give them because they separate out the risk of the collateral they accept and the loans they provide. He says that the likelihood of new stablecoins being added to Infinex is high. He says they can add things quickly, including USDe if it gains traction. Kain sees potential for USDe to be used as collateral for additional positions.
Young says he sees Infinex as a product representing the pragmatic middle ground in terms of custody, a scalable and usable product.
Kain sees convergence in different projects, attributing this to the availability of tech and infrastructure. He identifies the user experience (UX) as a missing component in competing with CeFi. He says the practical implementation of UX improvements will be a major shift, requiring various projects to bridge the usability gap. He highlights the need for more pragmatism in the crypto space.
Young mentions the Testnet forms available on their Twitter page for those interested in signing up.