Ethena’s $9.5 billion USD could potentially contest USDC’s position as the second-largest stablecoin by 2027.

USDe’s market capitalization increased from roughly $5.33 billion on July 17 to more than $9.3 billion by August 4, representing an almost 75% rise and elevating it to the third position among all stablecoins, following USDT and USDC.

This rapid growth has positioned Ethena’s synthetic dollar among leading stablecoins while also prompting inquiries about the ability of a delta-neutral, crypto-native asset to maintain such momentum in a market traditionally dominated by fiat-backed currencies.

The increase in market cap signifies more than mere investor excitement. In less than 30 days, over $3.1 billion in new USDe was generated. This surge aligns with favorable funding rates in the perpetual futures markets and a notable rise in interest surrounding Ethena’s ENA token buyback initiative.

Swift rise of USDe

The pace of USDe’s expansion is remarkable within the stablecoin sector, drawing comparisons to USDC’s growth, which surpassed the $10 billion mark in March 2021. At approximately $9.25 billion, USDe is now approaching a similar scale to that achievement.

USDC market cap growth (Source: CoinMarketCap)

In contrast to established players like USDT and USDC, which are supported by conventional banking instruments such as T-bills, USDe functions entirely on-chain through a synthetic framework. It is supported by a delta-neutral strategy that merges long spot positions in digital assets like BTC, ETH, or SOL with corresponding perpetual short positions.

The resulting basis or funding yield is distributed to stakers who convert USDe into sUSDe. Ethena has promoted this model as providing appealing returns while avoiding traditional financial intermediaries. As noted by the project’s founder, Guy Young, USDe aims to present a risk profile that is distinct from fiat-backed stablecoins.

The basis trade mechanism that underpins USDe’s yield has proven profitable in bullish or volatile market conditions, where perpetual funding spreads widen in favor of short sellers. This dynamic was a significant factor in USDe’s growth during July.

However, the sustainability of this yield is less certain. Funding rewards that previously exceeded 60% annualized have dropped below 5% as more capital has entered the trade.

Ethena’s own documentation highlights “funding risk” as a major concern, indicating that the strategy is highly susceptible to changes in market structure, particularly if funding turns negative or if counterparty stability on major exchanges is jeopardized.

USDe outpaces established stablecoins

Market data underscores the magnitude of USDe’s recent rise. According to CoinMarketCap and DefiLlama, USDe now ranks third among stablecoins by market capitalization, trailing only USDT’s approximately $164 billion and USDC’s roughly $64 billion.

Significantly, this growth has enabled USDe to surpass rebranded rivals such as USDS (formerly DAI), reflecting the reshuffling within the decentralized stablecoin hierarchy.

While still $50 billion behind USDC, USDe’s current size is equivalent to half of USDC’s market cap during its November 2023 decline to $24 billion.

If USDe were to sustain an 8.4% monthly growth rate, assuming USDC remains stable, it could exceed USDC within two years.

The model’s reflexivity has also attracted analytical attention. Young explained how the growth of USDe inadvertently generates demand for USDT: “For every unit of shorts Ethena adds to the market, a unit of Tether demand is created… a $1 increase in USDe leads to a ~$0.70 increase in USDT when USDe is backed purely by perpetual positions.” This market interaction suggests that USDe’s growth may indirectly bolster the very incumbents it aims to challenge, highlighting the complexity of its systemic relationships.

USDe’s recent trajectory illustrates the potential for a non-fiat-backed stablecoin to achieve significant scale. Its rapid rise emphasizes both the strengths and limitations of crypto-native yield mechanisms.

Yet, it also evokes memories of the algorithmic stablecoin Luna UST, which soared to over $60 billion in market cap before losing its peg and ultimately collapsing to zero.

While short-term momentum has propelled it to the forefront, whether it can sustain its pace amid reduced funding, custodial risk exposure, and regulatory scrutiny remains uncertain.

For the time being, Ethena’s synthetic dollar stands as a contender among giants, its future closely linked to the volatile mechanics it utilizes.

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