"Ethena is a major innovation", much like Terra once was! But the reality is far more complex.
Ethena might not be what you think, here are the issues that could lead to its downfall!
Far from wanting to spread FUD, I usually prefer to share optimism and positive insights.
But I find Ethena’s case very interesting to discuss, as almost no one talks about these issues.
Plus, it is a great case study to deepen our understanding of the ecosystem!
For those unfamiliar, Ethena’s innovation is to create a stablecoin ($USDe) backed by a delta-neutral hedging strategy.
On one side, they hold a $stETH spot position (or $BTC), balanced by a short ETH/USDT position on a perpetual contract.
In addition to providing a stable strategy for $USDe, each position generates yield benefiting $USDe:
• The $stETH spot position generates yield from liquid staking.
• The short position earns a funding rate.
Combined, these yields allow Ethena to offer impressive returns! On average, 13% on a stablecoin!
But as in all of finance, high yields come with high risks.
One risk identified by Ethena itself is that the funding rate can turn negative, potentially pushing yields below zero.
The funding rate is typically positive but can drop significantly when it goes negative.
t’s important to understand that holding $USDe means holding a delta-neutral position: Spot $stETH (or $BTC) and short ETH/USDT.
In other words, holding $USDe is essentially like being long on USDT perpetual.
A rather strange way to hold a stablecoin!
It’s actually riskier than simply holding USDT in a spot position or wallet.
$USDe is equivalent to holding a long USDT position on a perpetual contract.
Not to mention that the U.S. Treasury might sanction Tether!
Would this impact $USDe? Most likely!
Looking deeper, $USDe seems like a poor version of $DAI.
It’s essentially a basket of stablecoins comprising:
• 17% stablecoins ($USDT, $USDC spot)
• 31% ETH hedging, which is effectively long USDT perpetuals
• 52% BTC hedging, also effectively long USDT perpetual
So, in the end, it’s 17% pure stablecoins and 83% USDT perpetuals.
Another strange thing is that holding $USDe doesn’t directly generate yield for holders.
Yield is only distributed to those staking $USDe (which gives them $sUSDe in exchange for locking $USDe).
But simply holding $USDe generates yield that is seemingly not distributed to regular holders.
So where does this yield go?
The protocol retains it, which counts it as revenue, but it’s actually the yield that non-staking users could have received.
I have to admit, it’s a clever tactic!
So, why hold $USDe at all?
Simply because it’s incentivized with $ENA, Ethena’s utility token.
People hold $USDe to receive $ENA airdrops.
It’s as if Ethena buys real yield from the funding rate and staking in exchange for $ENA.
Yes, it’s as if they’re subtly dumping their own token on you!
And once again, it’s done very cleverly and subtly.
Currently, it’s the 66th largest token by market cap, with a $5B FDV and around $1B in market cap!
Ethena describes its product as decentralized, but I fail to see how it’s decentralized!
All strategies are executed on CEXs, mostly on Binance and Bybit.
Moreover, over 60% of $ENA is held by insiders, and in less than a year, their tokens will unlock. Hopefully, you won’t be holding $ENA by then!
What surprises me is the lack of logic in certain metrics.
The BTC OI-Weighted Funding Rate is rising, which should translate to more $USDe being minted to take advantage of the funding rate.
But that’s not happening, the opposite is, suggesting that smart money understands the situation better.
Smarts money are well aware of all this and likely knows even more, they’re probably waiting for the right time to short.
On Nansen, we can clearly see smart money exiting their $USDe and $ENA positions.
Smart money hardly holds any $USDe anymore.
And for those who argue “too big to fail,” remember Terra.
They failed even with a market cap of $18B, which didn’t stop them from collapsing.
Today, $USDe is ten times smaller. I’m not saying $USDe will fail; I’m just highlighting the red flags.
Market makers could also contribute to or even be responsible for this failure.
That’s what happened with Terra, MM saw an opportunity to profit more and shorted, even though they were Terra’s market makers.
This just shows that MM can drive a flawed system to collapse if it benefits them.
Again, I don’t mean to spread FUD, just raising awareness about this interesting case, which is useful for developing critical thinking and analytical skills.
I’ve drawn much inspiration from @TardFiWhale for this thread. He seems to know even more concerning details about Ethena.
He’s not a joke, he predicted the fall of $UST and $OHM and has helped multiple protocols address major issues. He’s someone to take seriously!
#USElections2024Countdown #TetherAEDLaunch #GrayscaleXRPTrust #16thBTCWhitePaperAnniv
