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 Bitcoin-backed synthetic dollar. Scheduled for release in June, USDh aims to attract Bitcoin holders by offering yields of up to 25%.
A Boon for Bitcoin Hodlers
Jakob Schillinger, founder and CEO of Hermetica, believes USDh will be a game-changer for Bitcoin DeFi. It will allow users to earn interest on their dollar holdings without leaving the Bitcoin network or relying on traditional financial institutions. This functionality caters specifically to Bitcoin enthusiasts who may be hesitant to venture outside 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 trend of Bitcoin DeFi (BTCFi), which seeks to replicate the success of Ethereum-based DeFi on the Bitcoin network.
Sustainability Concerns Over The 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 sparked worries about long-term viability. The collapse of TerraUSD (UST) in May 2022, which offered a 20% yield before its downfall, serves as a stark reminder of the risks associated with excessively high returns.
Hermetica addresses these concerns by claiming their yield generation method is sustainable. According to Schillinger, the yield comes from Bitcoin futures funding rates, which fluctuate based on market demand for leverage. Backtesting conducted by Hermetica suggests an average annual yield of 11.71% between January 2021 and March 2024, with the 2022 bull market reaching a peak of 26.11%. Schillinger further emphasizes the inherent demand for leverage in Bitcoin futures markets as a factor that will ensure 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 building functionalities specifically for Bitcoin. The introduction of Ordinals, a protocol enabling the inscription of data onto 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 within the next five years.
The high trading volume of Ordinals, exceeding that of Ethereum and Solana NFTs combined in a few months, fuels his optimism. With a vast pool of untapped capital potentially exceeding $1 trillion locked within Bitcoin, Schillinger believes Bitcoin DeFi is poised for explosive growth.
