DeFi
Bitcoin-backed synthetic dollar promises high returns for DeFi users
In a move that could significantly expand Bitcoin’s DeFi (decentralized finance) ecosystem, Hermetica Labs has announced the upcoming launch of USDh, the first-ever synthetic dollar backed by Bitcoin. Scheduled for release in June, USDh aims to attract Bitcoin holders by offering returns of up to 25%.
A boon for Bitcoin Hodlers
Jakob Schillinger, founder and CEO of Hermetica, believes that USDh will be a game changer for Bitcoin DeFi. This will allow users to earn interest on their dollar holdings without leaving the Bitcoin network or relying on traditional financial institutions. This feature is specifically aimed at Bitcoin enthusiasts who may be hesitant to venture outside of the Bitcoin ecosystem.
Hermetica is a DeFi protocol built on the Stacks blockchain, a layer one solution designed to bring smart contract functionality to Bitcoin. This positions USDh within the broader Bitcoin DeFi (BTCFi) trend, which seeks to replicate the success of Ethereum-based DeFi on the Bitcoin network.
Sustainability Concerns Over New Bitcoin-Backed Synthetic Dollar Cloud High Yields
However, the high yield offered by USDh raises concerns about its sustainability. Similar offerings, like Ethena’s USDe with its 27.6% yield, have raised concerns about their long-term viability. The collapse of TerraUSD (UST) in May 2022, which offered a 20% return before its fall, is a stark reminder of the risks associated with too high returns.
Hermetica addresses these concerns by asserting that its method of generating yield is sustainable. According to Schillinger, the return comes from Bitcoin Futures contract funding rates, which fluctuate based on market demand for leverage. Backtests conducted by Hermetica suggest an average annual return of 11.71% between January 2021 and March 2024, with the 2022 bull market peaking at 26.11%. Schillinger further highlights the inherent demand for leverage in Bitcoin futures markets as a factor that will ensure that USDh’s yield remains sustainable.
Bitcoin DeFi on the rise: ordinals as a catalyst
The launch of USDh coincides with a growing trend of DeFi protocols creating features specifically for Bitcoin. The introduction of Ordinals, a protocol allowing data to be written on individual Satoshis (the smallest unit of Bitcoin), is seen by Schillinger as a major catalyst for BTCFi. He predicts that Bitcoin DeFi will not only reach the size of Ethereum DeFi, but potentially surpass it in the next five years.
Fueling his optimism is the high trading volume of Ordinals, surpassing that of Ethereum and Solana NFTs combined over a few months. With a vast pool of untapped capital potentially exceeding $1 trillion locked in Bitcoin, Schillinger believes Bitcoin DeFi is poised for explosive growth.