Synthetic dollar (delta-neutral stablecoin)
Also called: synthetic dollar · delta-neutral stablecoin
Definition
A synthetic dollar is a dollar-pegged token backed by a crypto asset plus an equal short futures position, so price moves cancel out and the combined value stays near 1 USD.
How synthetic dollar works
A synthetic dollar does not hold bank deposits. Instead, the protocol holds an asset such as ETH or BTC and opens a short perpetual futures position of the same size. If ETH rises, the spot holding gains and the short loses about the same amount; if ETH falls, the opposite happens. This is called a delta-neutral hedge. Ethena's USDe is the best-known example.
The yield usually comes from two sources: staking rewards on the collateral, if any, and funding payments. When funding rates are positive, short positions receive payments from longs, which the protocol can pass on to holders who stake the token.
The risks are different from a fiat-backed stablecoin. Funding can turn negative for long periods, so the hedge costs money. The short positions sit on centralized exchanges, which adds exchange and custody risk. In extreme markets, liquidity for unwinding hedges can be thin, which can push the token below its peg.
Example
Suppose a protocol receives 1,000,000 USD and buys ETH at 2,500 USD, getting 400 ETH. It then shorts 400 ETH in perpetual futures. If ETH falls to 2,000 USD, the spot ETH loses 200,000 USD but the short gains about 200,000 USD, so backing stays near 1,000,000 USD. If funding pays shorts 0.01% every 8 hours on a 1,000,000 USD position, that is about 100 USD per payment, or roughly 300 USD per day before costs.
Common mistakes
- Thinking the yield is fixed when it depends heavily on funding rates that can drop or turn negative.
- Treating a synthetic dollar as identical to a bank-reserve stablecoin and ignoring exchange custody risk.
- Overlooking cooldown or unstaking periods before the staked version can be redeemed.
Learn and practise
FAQ
Is USDe a stablecoin?
USDe is usually described as a synthetic dollar. It targets 1 USD using crypto collateral hedged with short futures, not cash reserves in a bank.
What happens to a synthetic dollar when funding rates go negative?
Short positions then pay longs, so the hedge costs money. Protocols typically use a reserve fund to cover such periods, and yields for holders fall.