Bitcoin-Backed Synthetic Dollar Promises High Yields, But Sustainability Concerns Linger
A groundbreaking innovation in the decentralized finance (DeFi) space has emerged with the announcement of USDh, the first-ever Bitcoin-backed synthetic dollar. Hermetica Labs, the company behind this development, promises yields of up to 25% for Bitcoin holders, creating a stir within the crypto community.
A Boon for Bitcoin Hodlers
Jakob Schillinger, founder and CEO of Hermetica, envisions USDh as a transformative force in Bitcoin DeFi. It offers users the opportunity to earn substantial returns on their Bitcoin holdings without venturing outside the ecosystem or relying on traditional financial institutions. This feature is particularly attractive to those who prefer to keep their funds within the confines of the Bitcoin network.
Hermetica’s USDh is built on the Stacks blockchain, a platform designed to bring smart contract functionality to Bitcoin. This positions USDh within the burgeoning field of Bitcoin DeFi (BTCFi), which aims to replicate the successes of Ethereum-based DeFi on the Bitcoin network.
Sustainability Concerns Surface
Despite the allure of high yields, concerns about the sustainability of USDh have been raised. Ethena’s USDe, another similar offering with a 27.6% yield, has ignited worries about its long-term viability. The collapse of TerraUSD (UST) in 2022, which offered a 20% yield before its downfall, serves as a cautionary tale.
Hermetica’s Sustainability Claim
Hermetica, addressing these concerns, asserts that their yield generation method is sustainable. According to Schillinger, the yield stems from Bitcoin futures funding rates, which fluctuate based on market demand for leverage. Historical data suggests an average annual yield of 11.71% between 2021 and 2024, with a peak of 26.11% during the 2022 bull market. Schillinger emphasizes the persistent demand for leverage in Bitcoin futures markets as a factor that will ensure USDh’s yield remains sustainable.
Bitcoin DeFi on the Rise
The launch of USDh coincides with a growing trend of DeFi protocols developing solutions tailored for Bitcoin. The advent of Ordinals, a protocol allowing data to be inscribed onto Satoshis (the smallest unit of Bitcoin), is seen as a major catalyst for BTCFi. Schillinger predicts that Bitcoin DeFi will not only attain the scale of Ethereum DeFi but potentially exceed it within the next five years.
The significant trading volume of Ordinals, surpassing that of Ethereum and Solana NFTs in some months, reinforces his optimism. With a vast pool of untapped capital potentially exceeding $1 trillion locked within Bitcoin, Schillinger believes Bitcoin DeFi stands poised for substantial growth.