Hermetica Labs, a DeFi protocol built on the Stacks blockchain, has announced the upcoming launch of USDh, the first-ever Bitcoin-backed synthetic dollar. This move is expected to significantly expand Bitcoin’s DeFi ecosystem and attract Bitcoin holders by offering yields of up to 25%. Jakob Schillinger, the founder and CEO of Hermetica, believes that USDh will be a game-changer for Bitcoin DeFi, as it allows users to earn interest on their dollar holdings without relying on traditional financial institutions or leaving the Bitcoin network. This functionality is specifically designed for Bitcoin enthusiasts who may be hesitant to venture outside the Bitcoin ecosystem.
However, there are concerns about the sustainability of the high yield offered by USDh. Similar offerings in the past, such as Ethena’s USDe with its 27.6% yield, have raised worries about long-term viability. The recent collapse of TerraUSD (UST), which offered a 20% yield before its downfall, serves as a reminder of the risks associated with excessively high returns.
To address these concerns, Hermetica claims that their yield generation method is sustainable. 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 emphasizes that the inherent demand for leverage in Bitcoin futures markets will ensure USDh’s yield remains sustainable.
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 as a major catalyst for Bitcoin DeFi. Schillinger predicts that Bitcoin DeFi will not only reach the size of Ethereum DeFi but potentially surpass it within the next five years. He is optimistic about this growth potential, citing the high trading volume of Ordinals, which has exceeded that of Ethereum and Solana NFTs combined in some months. With a vast pool of untapped capital potentially exceeding $1 trillion locked within Bitcoin, Schillinger believes that Bitcoin DeFi is poised for explosive growth.
