Ethena’s USDe Surpasses DAI to Become the Third-Largest Stablecoin

Ethena's decentralized finance (DeFi) protocol stablecoin, USDe, has rapidly ascended in the ranks, surpassing Sky's Dai (DAI) in total market capitalization. According to data from DeFiLlama, USDe is now the third-largest stablecoin, following Tether’s USDt and USD Coin (USDC).

At the time of writing, USDe's market capitalization stands at just under $6 billion. While it still lags significantly behind the leading stablecoins, USDt and USDC — which boast market caps of approximately $140 billion and $40 billion, respectively — USDe's rise marks a significant milestone in the stablecoin landscape. Meanwhile, Dai, the flagship stablecoin of Sky (formerly Maker), has seen its market cap decline from over $7 billion in 2022 to around $4.5 billion, according to DeFiLlama.

The Rise of CeDeFi and High-Yield Staking

Launched in February 2024, USDe has captured the attention of stablecoin holders seeking higher returns. The coin’s success is largely attributed to Ethena's CeDeFi (Centralized Decentralized Finance) yield strategy, which offers double-digit annual percentage yields (APY). CeDeFi combines decentralized finance protocols with trading on centralized exchanges, creating a hybrid financial model that has attracted significant capital inflows.

“Since its launch, holders of staked USDe (sUSDe) have enjoyed an average APY of 17.5%, peaking at 55.9% in March 2024, and bottoming at 4.3% in August 2024,” cryptocurrency researcher Messari reported in a Dec. 12 note. As of December 12, sUSDe is yielding approximately 24% APY, according to DeFiLlama.

Innovative Token-Minting and Hedging Strategy

Ethena’s approach involves users minting USDe using various tokens such as Bitcoin (BTC), Ether (ETH), liquid staking tokens (LSTs), and other stablecoins. The protocol hedges against the portfolio's inherent volatility by leveraging off-chain financial derivatives, such as futures and perpetual contracts, which generate yield from staked assets (e.g., Lido's stETH). These gains are then passed on to USDe holders, providing them with attractive returns.

However, Messari also cautioned that Ethena’s CeDeFi strategy carries risks, including potential failures of off-chain exchanges, custodians, and settlement providers. Despite these risks, USDe’s rapid adoption suggests that users are increasingly willing to take on such exposure for the opportunity of high yields.

Growing Adoption and Strategic Partnerships

USDe has seen swift integration across the cryptocurrency ecosystem. In October, Wintermute, a leading cryptocurrency trading desk, began accepting USDe as collateral for trading. In June, staked USDe (sUSDe) was integrated with DeFi lending giant Aave, where it quickly became the fastest-growing asset on the platform.

As of 2024, Ethena generated approximately $200 million in fees, a significant sum that reflects the protocol's growing prominence. Additionally, in November, the Ethena Foundation announced it would share a portion of these earnings with tokenholders. The value of Ethena’s native token, ENA, has increased roughly fivefold since June, according to CoinGecko data.

Sky’s Challenges and Criticisms

While USDe gains momentum, its competitor, DAI, has been undergoing a rebranding and restructuring process. In August, MakerDAO, the issuer of Dai, rebranded as Sky and implemented changes to the Dai protocol, including renaming its decentralized stablecoin to USDS. These changes have sparked criticism, with some raising concerns over cybersecurity risks and the potential for asset freezes, which could undermine the stability and trust in the platform.

Despite these challenges faced by its competitors, Ethena’s USDe continues to position itself as a formidable force in the stablecoin market, thanks to its innovative yield-generating strategies and expanding adoption. As the stablecoin ecosystem evolves, Ethena’s USDe could continue to capture significant market share, challenging traditional players like DAI and USDt.