USPD vs. Ethena (USDE): A Critical Look at Custodial Risk & True Yield

Ethena’s USDE has taken the crypto world by storm, attracting billions in capital with its promise of a high-yield, scalable “synthetic dollar.” Its innovative use of a delta-neutral hedging strategy has positioned it as a major force in the market.

Its architecture shares critical similarities with our own protocol: USPD (US Permissionless Dollar). Both use staked ETH and short perpetual futures to maintain a dollar peg. However, a single, fundamental difference in their design creates a vast chasm in their risk profiles: custody.

This article provides an in-depth comparison of USDE and USPD, focusing on the critical distinctions in their risk models, decentralization, and the true nature of their yield.

Pillar 1: Sovereignty & Risk - The Custodial vs. Non-Custodial Model

This is the most important differentiator between the two protocols and has profound implications for user safety.

Ethena (USDE) operates on a centralized, custodial model. When users deposit assets like stETH to mint USDE, those assets are controlled by Ethena Labs. Ethena then uses these user funds as margin to open its short positions on centralized exchanges (e.g., Binance, Bybit). This means the USDE holder is directly exposed to multiple layers of counterparty risk:
1. Ethena Labs: You are trusting the operational security of the Ethena team.
2. Third-Party Custodians: You are trusting the custodians (like Ceffu) that hold the assets off-chain.
3. Centralized Exchanges: You are trusting the solvency and security of the exchanges where the hedges are placed. A failure at any of these points could result in a catastrophic loss of user funds.
USPD operates on a truly decentralized, non-custodial model. When a user mints USPD, their stETH collateral remains in a public, on-chain smart contract, fully under the control of the protocol. The hedging is performed by a decentralized network of “Stabilizers” who use their own, separate capital. User funds are never sent to a centralized entity, never held by a third-party custodian, and never used as margin on an exchange. This design completely segregates user collateral from the risks of the hedging mechanism.

Pillar 2: Transparency - On-Chain Activity vs. Off-Chain Risk

Both protocols provide on-chain data, but the location of the critical risk is fundamentally different.

Ethena’s transparency shows on-chain deposits, but the risk moves off-chain. You can see assets moving into Ethena’s contracts, but the most complex and dangerous part of the operation—the management of leveraged short positions—happens behind the closed doors of centralized exchanges. The health of the system depends on off-chain factors you cannot independently verify in real-time.
USPD’s transparency keeps the entire risk model on-chain. The user’s collateral, the Stabilizers’ over-collateralization, and the protocol’s overall health are all verifiable on the public ledger. The risk is not outsourced to opaque, off-chain entities; it is managed transparently by the rules of the smart contract.

Pillar 3: Stability Mechanism - A Centralized Operator vs. A Decentralized Network

While both use a delta-neutral strategy, the execution reveals their core philosophies.

Ethena’s stability relies on a single, centralized operator. Ethena Labs is the sole entity responsible for managing the hedge. This creates a single point of failure. If their systems go down or they make an operational error, the entire peg is at risk.
USPD’s stability relies on a decentralized network of competing Stabilizers. Anyone can operate a Stabilizer, creating a resilient, redundant system. If one Stabilizer fails, others are economically incentivized to step in. The protocol is not dependent on any single entity for its survival. Furthermore, USPD is structurally over-collateralized by at least 25% and features an on-chain Insurance Fund, providing additional layers of security that are absent in Ethena’s model.

Pillar 4: Yield Source - The “Basis Trade” vs. Native Staking

Both protocols are known for their yield, but the source and risk profile of that yield are critically different.

Ethena’s high yield comes primarily from funding rates. The “sUSDE” yield is generated by capturing the ETH staking yield plus the funding rate paid by traders on perpetual futures. While often positive and high, funding rates are notoriously volatile and can turn negative for extended periods, which would dramatically reduce or even negate the yield. This is a high-reward, but also high-risk, yield source.
USPD’s yield is a sustainable, native return. The base yield for all USPD holders is derived directly and solely from the underlying stETH staking rewards (~3% APY). It is a real, passive, and sustainable yield that is not dependent on volatile market sentiment or trading behavior.

Summary of Comparative Advantages

While Ethena offers the potential for higher yield, it comes at the cost of significant, often misunderstood, custodial and counterparty risks. USPD is designed to provide a more resilient and truly decentralized alternative.

Advantage 1: Non-Custodial Security. USPD is fundamentally safer for the end-user because it is non-custodial. Your collateral is never controlled by a third party, eliminating the primary counterparty risks inherent in Ethena’s model.
Advantage 2: True Decentralization. USPD’s stability mechanism is managed by a decentralized network of actors, making it more resilient and removing the single point of failure that exists with Ethena’s centralized operator.
Advantage 3: Structural Over-Collateralization. USPD’s requirement for at least 125% collateralization provides a structural safety buffer that is absent in Ethena’s 1:1 model, making it more robust against black swan events.
Advantage 4: Sustainable and Verifiable Yield. USPD’s base yield is derived from the transparent and sustainable process of Ethereum staking, not from volatile and unpredictable funding rates.

Learn more about how USPD works .