Ethena Labs - Navigating the Synthetic Dollar

um so yes uh my name is Guy founder of Athena um if you haven't heard what we're up to in the last few months um going to give you a quick overview of uh the product of Athena which is what we've called a synthetic dollar looks very different to a normal feared stable coin in terms of its construction but then also the risks that sit behind it and then uh just going to walk through how we sort of think about the product design and um what we think is quite unique and and interesting about the product so uh thought we would start with like the actual Genesis of uh of the idea itself so Arthur Hayes actually came out with an article at the beginning of 2023 where he outlined his vision for how we might be able to create our own form of money within crypto he thought that this was potentially one of the biggest opportunities that we had which is um really just thinking about like money as the biggest opportunity and an addressable Market within crypto whether it's the origins of Bitcoin or like eventually ethereum moving to try and be like money with changes in in its monetary policy it's always been what people aspire to which is creating money and uh the observation was we hadn't really found a capital efficient and scalable way to create our own form of dollar with within crypto so the basic idea actually uh wasn't that new um Traders had been doing this on bitn bitmax and other derivative exchanges even before tether was around and and had spread uh properly so back in 2016 if you wanted to go on a holiday and you're uh in an open open derivative position on one of these exchanges what you'd do is you'd post collateral uh Bitcoin collateral and then short the derivative on the other side uh which would create a delta neutral position and what that meant was if the price moved up by 10% or moved down by 10% the the net position there was actually equal to to a dollar still so all thetha was doing was taking that basic concept that had been around for many years and had been done in trafi uh so a cash and carry is one of the oldest sort of uh yield generating mechanisms that you find in traditional markets as well and all we're doing is productizing that and putting it into a token so that it became composable within Defi and then CI as well and really that's the vision of what we're trying to do here which is create our own form of money and um we thought that this was an optimal sort of construction to get towards that that Vision so in terms of the actual mechanics of how this is working um I don't know if anyone's actually interacted with uh Athena's USD um in the room but uh as Sebastian was actually alluding to in his slides there's a primary and a secondary Market that exists within Athena so you have uh approved parties who are kyc individuals much like you see with circle or tether where you you can actually do the direct mint and redeem with Athena what's going on in the background there is usdt or usdc is being sent through to Athena there's a minting fee that's attached to that and that's very similar to what you see with tether which is a 10 basis point fee to cover like the execution cost for putting on the hedges on the other side and that collateral is sent through to custodians uh so qualified custodians um which uh which deal with institutions every day this was a key piece of something that we wanted to to ensure was actually different to the way that Arthur outlined his idea in the original post which was uh I personally didn't feel comfortable um having users assets sitting on a centralized exchange after what we saw with FTX and so a big piece of the design and it was actually the longest piece for us to sort of get implemented uh when we're getting off the ground with Athena was how could we access the liquidity of centralized exchanges in order to get this to scale to a size that was meaningful but doing so in like a uh at least a trust minimized way where you could hold the collateral assets within uh custodians and and isolated from exchanges so that's a key piece to understand here which is we don't actually have a hold users assets on centralized exchanges it's sitting with these custodians doesn't mean the risk is zero but I think it looks very different to to having full exposure to centralized exchange and then uh what happens with that those dollars when they come through the system is very simply you're either buying liquid staking tokens like steth or eth uh or Bitcoin and as that is executed there's a hedge on the other side so that that position is is delta neutral and it's held in that position so since since we came out uh it's been reasonably quick growth um I think this chart is a little bit unfair because a lot of the comparisons there had been around when crypto was a much smaller industry and so uh I think it looks quite dramatic that graph but um slightly unfair in the way it's being presented um but I think it's it's worth just sort of like asking what is it that actually drove this and what was sort of the behavior and the response in the market or at least the Design Within athenia that actually triggered that response so I think um there's really two pieces to athenia there's the synthetic dollar that I described but then one interesting byproduct of putting on that delta neutral position is actually the yield that's actually being captured uh within there so um I think crypto's got this strange obsession with yield and it exists within tradire as well where people are really obsessed with it but there isn't really any that many things that actually produce cash flow at billion dollar scale within crypto um if you actually look at the whole market and just take one step back there are only two things that actually people pay billions of dollars of real cash for in crypto it's block space on ethereum which is captured within Ste and then it's the basis within the Futures Market uh that exists within CI uh obviously the market is adjusted now and a bunch of the different like rwa protocols that you'll sort of hear through today are now importing tradire yields but within crypto those are the only two things that you can do to get billions of dollars of cash flow into an instrument and so you can actually think about um Athena as not only creating that dollar but it's actually just taking the two forms of scalable Crypton native yield and putting it together in a single dollar instrument that you can capture that yield and that has been what I think has actually driven the response here within the market which is users are now able to actually Express a risk preference and it's something that Martin was touching on in his presentation which is you don't only have to take zero or five now within crypto you've got different options in terms of how you you actually Express that risk preference so um that's not to say like these things are better or worse and I think uh it's a key theme that I sort of want to get across here um there are different risks that are involved with Athena that look very different to having credit exposure to the US government I I think that that much is clear but I think what is important here and it's one of the things that I found most interesting and actually powerful about crypto it's that you're allowed to to be an adult within crypto and actually just decide for yourself does that risk make sense for me to to come in there and so there's going to be periods where Athena do look attractive relative to the market and that's just a decision that you have to make given sort of the different risks that that actually exist within the system on the on the side of that um just wanted to sort of jump into how we think about it as like a business as well because I think that's that's something that we sort of sometimes Miss within crypto as we create products but then uh forget about how how that actually looks like from a business perspective so um one thing that looks quite different here is we tried to present this in a uh it's called a return on an asset framework so it's just taking what is your interest income and then the amount that you're actually paying out and and what is sort of left there to be captured um and so a lot of the well I think everyone sort of understands that tether is one of the greatest business models that's ever been created right they're sitting on North of100 billion of assets and then taking a full 100% of the interest income that exists there and then there's sort of a sliding scale I think in terms of how much you can actually extract uh from from that gross asset income and so uh with Athena that's one thing again when you're producing an outsize sort of risk adjusted return there is more scope for you to actually capture capture sort of returns back to the protocol itself so yeah I think um jumping into the RIS uh it was like a big piece that I did want to get across in terms of how this actually looked different I think the key piece to on S with anything whe whether it's a stable a normal fear stable coin or a crypto backed one the key risk is always going to be around custody right so I think we saw this back in the beginning of 2023 where everyone had an assumption that uh usdc or those fear stable coins were essentially risk-free and I think we learned over the weekend with svb that that was not the case and they had to get bailed out by the by the US government that weekend um whenever you have assets sitting um and being held in some sort of custody that could be in a bank in the real world it could be in in a smart contract that's sitting on chain or a qualified custodian uh like Athena is using within crypto that is always going to be the key risk where if a custodian's losing your money you you're you're screwed as a stable coin issuer on the other side um so the key piece for for Athena in terms of the risk that look different is you have exposure to the the custodians who are holding the assets you also face um credit risk to exchanges on the other side so while the assets are not actually sitting within custodian uh on the exchanges themselves you do have the derivative position that sits on exchanges and that means that if one of the exchanges do go down you might lose the Hedge leg that sits on on one side of of the asset backing and then another thing that looks quite different is we've we've generally seen the funding rates within the market so I didn't really fully explain where you get that yield from and what is sort of the nature of of why you're getting paid to put in that cash and carry um at a very simple level the Perpetual swap which is the hedging instrument that's used behind Athena um is basically the the instrument that people use uh for leverage within crypto to get long and express a long uh biased f of the market and there's just simply a a demand uh and Supply imbalance in crypto uh for dollars and so generally people within the market think the Market's going up uh they want to actually pay to access more leverage uh to express that view and really all Athena is doing is providing dollars on the other side for someone to take that that levered expression generally that that interest rate is strongly positive through time um but that's not always the case so during extremely bearish conditions you do sometimes see funding dip below zero and for that reason there is a reserve fund that sits behind Athena which is there to sort of cover for those moments where you might not have a positive interest rate and and you need an additional buffer that's it's there so just in terms of uh where we sort of see the actual product going um Athena's not actually been out uh for that long uh we launched the public in February of this year and it was very much sort of focused on uh def Integrations in the beginning so a few of the projects that you'll sort of uh listen to today and some of the founders who are here a key piece for what we're doing there was trying as best as we could to integrate onto different defi applications from uh amm to money markets uh we had a integration go with Mead da where Athena is now part of the backing or there is some exposure to to die now within Athena and then some of the interesting new yield trading platforms that you've seen coming out with pendal so that was really the first phase of of Athena's growth which was starting in D5 for for the first couple of months but we actually see the two other opportunities as much larger opportunities than than what's been done in defi so far so um one piece that I think existing sort of stable issues have have overlooked some uh somewhat in the last few years is actually the importance of centralized exchanges and CI generally for the adoption of of stable like assets uh so the biggest success stories that you've seen with stable coins have always been related to an issuer being attached to distribution with an exchange so tether with bitfinex or usdc with coinbase it's always an exchange that's actually pushing um stable coins to become successful with their users on the other side uh so key piece for us was actually can you make this an interesting asset that you actually want to put into C5 venues where people use this as a trading instrument uh in their day-to-day um uh trading activities and so one key piece that sort of came out in the last couple of months is that uh we got listed as collateral on biid where where you can actually use USD now capture yield while you're trading and use that to offset some of your funding costs on the other side uh to give you guys a sense of the the sort of size of that market and and how big that is there's around $25 billion now of tether which is used exclusively just to margin uh linear perpetuals and we think that you know serving some small part of that market is actually a huge opportunity for a new yield bearing type of dollar and then the third bucket there I think is one that's obviously become more interesting this year where you have um uh obviously the ETFs taking uh Center Stage within the market and trifly sort of showing a greater interest in actually um engaging with crypto generally um what's interesting about this is I think circling back to the idea that we had around capturing the two forms of scalable crypto native yield your to put that in a single instrument and actually export it out into trafi we think is a pretty interesting opportunity for them where a lot of the work that we're doing around rwas is really bringing a product that they have access to already on chain which is not something that's like that interesting to people with in Trad it's like would I come do this on chain or or would I actually just access it myself in the real world the rwa type products are interesting to crypto people who don't want to actually go back into the real world and sort of reduce that friction so what we're actually trying to do is think about that in Reverse is can you produce a product which is uniquely enabled by crypto and you can actually export out into trafi and if you can wrap that up in the right way with some of the custodians that we mentioned earlier we think that actually providing that as a interesting risk adjusted deal to them is a huge opportunity um to just capture dollar yield within crypto for them so yeah that's the um Athena Story how it sort of all comes together and uh and some of the risks so thanks for listening [Applause]