Guy Young (Ethena) on Digital Financial Markets (EP.737)

Guy Young discusses Ethena's innovative approach to issuing durable financial assets on a blockchain, particularly highlighting the USDE as a leading tokenized dollar product that generates yield through delta neutral hedging and staking. Since its launch in late 2023, Ethena has achieved significant scale across various market conditions, with the USD product demonstrating notable utility and stability.

Young emphasizes the need for differentiation in the dollar asset issuer space, especially given the competition from larger players. He argues that enhancing user experience by sharing rewards generated from the asset with users is crucial, and that targeted distribution is vital for success in the dollar asset market, where a small number of key counterparties drive the majority of outcomes.

He predicts a rise in dollar-linked products that offer returns but warns against misrepresenting these products as having perfect credit risk associated with the US government. Young believes that innovation in dollar-linked products will continue to evolve, although achieving scale remains a significant challenge when introducing new collateral or yield sources.

Young notes that on-chain portfolio construction is becoming more feasible as quality products emerge, and he observes an acceleration in the market maturity curve for digital financial markets. He points out that interest in real-world assets tends to increase during crypto bear markets, and the trend of tokenization continues to grow despite fluctuations in crypto prices.

He highlights that 90% of non-equity linked tokenized products are held by Ethena and Sky, raising questions about who benefits from the growth of tokenization. Young anticipates an influx of asset issuers and diversification of assets in the market, although he acknowledges that regulatory and KYC challenges may limit the expansion of tokenized assets.

Young discusses a notable decrease in total stablecoin supply from 2022 to 2023, indicating capital outflows during bear markets, but he notes that the introduction of on-chain products has helped retain some capital. He expresses skepticism about the venture capital industry's performance in the last cycle, which has led to a reduction in the size of crypto-focused funds.

He observes that many liquid capital sources are now incorporating equities into their investment strategies to avoid being overly reliant on crypto, and he notes a significant contraction in the market compared to the previous bull cycle. Young believes that the stagnation of asset prices, despite regulatory acceptance, has contributed to the pain experienced in the last cycle.

Young discusses the implications of large entities entering the crypto space, suggesting that value may increasingly accrue to equity rather than tokens. He notes a shift in the perception of Ethereum, from a potential replacement for all finance to a backend for a subset of financial services. He believes the probability of creating trillions of dollars of value in the crypto space is now higher than ever, while also recognizing emerging challenges such as AI and quantum computing.

Young outlines Ethena's goal of creating more efficient methods for moving and settling money, positioning the company as a new age bank. He identifies the largest opportunity in the crypto space as building a user base of 100 million to 1 billion users, with the potential for products to achieve a scale comparable to Bitcoin as a store of value. He cites Tether's success in demonstrating demand for digital dollars, noting that the current cycle of digital financial markets seems almost detached from broader crypto trends.

He concludes that simple savings products tend to exhibit more durability through market cycles compared to trading activities, with crypto volumes down 60 to 70% from the last cycle. Young mentions that companies like Coinbase and Robinhood have diversified their revenue streams beyond crypto trading, highlighting the symbiotic relationship between asset managers and on-chain businesses. Ethena's business model focuses on generating a net interest margin similar to traditional banks, achieving an average yield of around 6.8%. The company aims to restore its savings product supply to 15 to 25 billion in the next 18 to 24 months and boasts the largest white label stablecoin insurance platform in the market.

Young also discusses Ethena's development of a vertically integrated neobanking mobile application that combines asset issuance with neobanking services. He highlights that current market products often result in a significant portion of revenues being directed to South Korea and Tether due to a lack of vertical integration. He believes that controlling the highest yield in the market on dollars provides a structural advantage for competing and retaining users, and that delivering financial products through a simple mobile app is the most effective way to reach users outside the crypto space. Ethena's strategy aims to broaden distribution by getting closer to the end user, which is expected to drive higher margins, although he notes that the neobanking application is still in development and represents a future opportunity.