Ethena's USDe, an Ethereum-based synthetic dollar, has experienced a significant contraction in its supply as dollar-backed stablecoins gain traction. This shift highlights the dynamic nature of the stablecoin market, where innovative models compete for dominance amid evolving investor sentiment and regulatory landscapes.

USDe's Supply Contraction

Over the past month, the supply of Ethena's USDe has plummeted, with its circulating supply falling from a peak of nearly $15 billion to around $8.5 billion. This 40% decrease reflects a cooling interest in riskier crypto bets, as market instability and cautious trading behavior impact the token's appeal. Further, in one week of November 2025, $700 million in redemptions occurred. Since October 11, 2025, USDe's market capitalization has dropped by over $5.4 billion.

Unlike traditional stablecoins like Tether's USDT and Circle's USDC, which are backed by dollars or dollar-equivalents, USDe employs a delta-neutral hedging strategy. This involves hedging deposits used to mint USDe with bearish perpetual futures bets on centralized crypto exchanges. The yield earned from these bets is a key factor in USDe's popularity; however, when traders are cautious and funding rates decline, the yield for USDe stakers drops, making it less attractive compared to holding cash.

Dollar-Backed Stablecoins Expansion

While USDe faces headwinds, dollar-backed stablecoins are experiencing growth and increased adoption. These stablecoins, such as USDT and USDC, are typically backed by reserves of fiat currency or other traditional assets, offering a perceived level of stability and security. The total transfer volume of stablecoins hit $27.6 trillion last year, surpassing the combined volume of Visa and Mastercard transactions in 2024.

Tether (USDT) dominates the stablecoin sector with a market capitalization of over $143 billion. USD Coin (USDC), created by Circle, follows with a market capitalization exceeding $58 billion. The significant gap between USDT and USDC can be attributed to differing geographic adoption, with USDT seeing more trade volume in Asia and Europe, while USDC is more active in North America.

The rise of dollar-backed stablecoins reflects a broader trend of increasing institutional interest and regulatory clarity in the stablecoin market. The potential passage of the Genius Act and comments from the U.S. Secretary of Treasury suggest a pathway for further growth and integration of stablecoins into the mainstream financial system.

Impact and Future Outlook

The contraction of Ethena's USDe and the expansion of dollar-backed stablecoins highlight the ongoing competition and innovation within the stablecoin market. While USDe's unique yield-generating mechanism attracted early adopters, its reliance on market conditions and complex strategies introduces inherent risks. The recent turmoil in the Ethereum price has compounded redemption pressures.

Ethena is adapting to these challenges by exploring new avenues, including the development of a fiat-backed stablecoin called USDtb designed for compliance with the U.S. GENIUS Act. They are also working on Converge, an institutional consensus layer in partnership with Securitize and BlackRock, aimed at bridging tokenized finance and mainstream capital markets.

The stablecoin market is projected to reach $2 trillion by 2028, according to the U.S. Treasury, indicating substantial growth potential. As the market evolves, stablecoins will likely play an increasingly important role in facilitating digital transactions, cross-border payments, and decentralized finance. However, regulatory scrutiny and market volatility will continue to shape the competitive landscape, requiring stablecoin issuers to prioritize transparency, security, and sustainable models.