ENA (Ethena) makes it possible for the Web3 world to have independent currency (stablecoin) issuance and pricing rights, and the future growth potential and imagination space are huge.
Of course, this is just an objective analysis, but judging from the market, the trend is not optimistic!
1.1 Project Introduction
When it comes to ENA, people often mistakenly think that it is just a decentralized stablecoin USDe project. But in fact, the significance of the ENA project goes far beyond this. It aims to solve the problems of autonomous currency issuance and basic pricing in the web3 world and return the right to issue currency to the web3 world.
To understand the deep meaning of ENA, we need to trace back the history of currency development. Early currencies existed in the form of shells, bronze, silver, gold, etc., and later developed into paper money, the issuance of which was restricted by the gold and silver inventory. However, with economic development, gold reserves were insufficient, and the monetary system transitioned from the gold standard to the treasury bond standard, that is, the country issued ultra-long-term treasury bonds, and the central bank printed banknotes to purchase them to realize currency issuance. Although this mechanism can stimulate the economy, it is also easy to trigger the trap of excessive currency issuance.
The concept of "Internet Bonds" in the ENA project is similar to the currency issuance mechanism based on treasury bonds, providing a new currency issuance and pricing method for the web3 world. Through ENA, the web3 world is expected to achieve a more autonomous and flexible monetary system to promote economic development.
In short, the ENA project is not only a stablecoin project, but also an important innovation in the monetary system of the web3 world, which is expected to inject new vitality into the economic development of the web3 world.
1.2 Investment Logic
BTC, ETH, etc. are first of all high-quality assets, similar to gold in the real world. Although they can be used for payment and purchase, they are essentially assets, not pricing currencies or issuing currencies. However, with the booming development of web3, the market needs more liquidity, which is currently mainly achieved through the use of centralized stablecoins such as USDT and SUDC that rely on traditional financial infrastructure. Centralized stablecoins face three biggest challenges:
1. The bond collateral (such as U.S. Treasury bonds) must be kept in the regulated bank account, which has unhedged custody risks and is susceptible to regulatory scrutiny;
2. Heavy reliance on existing banking infrastructure and evolving regulations in specific countries (including the United States);
3. Since the issuer internalizes the returns generated by leveraging the supporting assets and transfers the decoupling risk to users, users face the risk of “no return”.
Therefore, decentralized and reasonably stable assets that do not rely on traditional financial infrastructure are the only way for the development of web3. They can be used as both transaction currencies and core basic assets for financing. Without independent and reasonably stable reserve stable assets, both centralized and decentralized order books are inherently very fragile.
Long before ENA, there were pioneers who had attempted decentralized stablecoins, with MakerDAO (DAI), UST, etc. However, these pioneers encountered many problems related to scalability, mechanism design, and lack of user incentives.
1. “Overcollateralized stablecoins” (typically MakerDAO’s DAI, 1.5x collateralization ratio) have historically encountered scaling issues because their growth is inseparable from the growth of leverage demand on the Ethereum chain and the rapid rise and fall of Ether. For example, DAO, 1.5x collateralization ratio and 1.4x liquidation collateralization ratio, are inefficient and lack collateralization desire. Recently, some stablecoins have begun to introduce treasury bonds to improve scalability, but at the cost of sacrificing anti-censorship capabilities.
2. The mechanism design of “algorithmic stablecoins” (typically represented by UST) faces challenges and is inherently fragile and unstable. Such designs are unlikely to have sustainable scalability.
3. The previous “Delta Neutral Synthetic Dollar” was difficult to scale because it relied heavily on decentralized trading venues that lacked sufficient liquidity and were vulnerable to smart contract attacks.
The ENA project has learned from historical lessons and proposed a relatively perfect solution, with corresponding countermeasures in terms of scalability, stability and resistance to censorship, which will be introduced in detail in the technical chapter. ENA enables the web3 world to issue stablecoins independently, and its economic model will also attract more participants to provide liquidity.
The market prospects of stablecoins are broad. In 2023, the stablecoins used for on-chain transaction settlements exceeded 12 trillion US dollars. According to AllianceBernstein's forecast, by 2028, the stablecoin market size may reach 2.8 trillion US dollars, showing huge growth potential.
The ENA project is expected to bring innovative currency issuance and pricing methods to the web3 world, promote economic development, and is expected to occupy an important position in the future stablecoin market.
1.3 Investment Risks
Although Ethena has its unique advantages, it also has potential risks that need to be taken seriously, including:
Financing risks
“Funding risk” is related to the possibility of persistent negative funding rates. Ethena can earn income from funding, but it may also need to pay funding fees. First, negative returns tend not to last long and will quickly return to a positive mean; second, the establishment of the reserve fund is to ensure that negative returns will not be passed on to users.
Liquidation risk
Liquidation risk refers to the risk of forced liquidation caused by insufficient margin in centralized exchanges during delta neutral hedging. For Ethena, derivatives trading is only for delta neutral hedging, with low leverage and low probability of liquidation risk. At the same time, Ethena uses a variety of methods such as additional collateral, temporary circular entrustment between exchanges, and reserve funds to ensure that liquidation risk does not occur or has little impact after it occurs.
Custody risks
Ethena relies on “over-the-counter settlement” (OES) providers to hold protocol-backed assets, so there is a “custodial risk”. To solve this problem, on the one hand, Ethena holds it through a bankruptcy-remote trust, and on the other hand, it cooperates with multiple OES, such as Copper, Ceffu, and Fireblocks.
Risk of exchange bankruptcy
First, Ethena works with multiple exchanges to spread risk and mitigate the potential impact of exchange bankruptcy; second, Ethena retains full control and ownership of assets through OES providers without depositing any collateral with any exchange. This allows the impact of any exchange's special events to be limited to the outstanding profit and loss between OES provider settlement cycles.
Mortgage risk
“Collateral risk” refers to the fact that the backing asset of USDe (stETH) is different from the underlying asset (ETH) of the perpetual futures position. However, due to low leverage and small collateral discount, the impact of stETH decoupling on hedge positions is minimal.
2.1 Technology
Ethena is an Ethereum-based synthetic dollar protocol that aims to provide crypto-native currency solutions and globally accessible dollar-denominated instruments - "Internet bonds". Its core product USDe is a crypto-native, scalable currency that achieves stability through delta hedging of Ethereum and Bitcoin collateral.
“Internet Bonds” is another innovation of Ethena, which combines the income generated by pledged assets with market financing and underlying spreads to build the first on-chain crypto-native currency solution.
USDe achieves stability, censorship resistance, and economic benefits through its unique mechanism while addressing the shortcomings and risks of other projects. These features give Ethena a unique advantage in the cryptocurrency field and are expected to provide the market with a safer and more stable currency solution.
Stability
Users can mint and exchange assets such as stETH and stBTC held by them for USDe through external liquidity pools or directly using Ethena contracts. During the minting process, Ethena performs Delta neutral hedging through external centralized exchanges to ensure that the dollar value of USDe is stable and not affected by market fluctuations. Even if the price of ETH changes significantly, the dollar value of the portfolio will remain relatively stable because any profits or losses from price changes will be offset by the hedging operation.
Scalability
Due to the Delta neutral strategy that makes the ratio 1 to 1, coupled with the liquidity guarantee of multiple centralized exchanges, as well as high-value and highly scalable pledged currencies such as ETH and BTC, USDe has great scalability. Currently, only ETH has a pledge ratio of up to 27% (as of April 2024), and the total pledge amount is about 160 billion US dollars. The consensus of Ethereum researchers and Ethereum ecosystem staff is that the pledge amount of ETH will soon reach more than 40%. This also brings a lot of imagination space for the scale growth of USDe.
Resist censorship
Ethena uses an "over-the-counter settlement" (OES) provider to hold supporting assets, which helps it entrust/deregister collateral to centralized exchanges while avoiding exchange-specific risks. Although there is a technical dependence on OES providers, OES providers typically hold funds in bankruptcy-isolated trusts to ensure asset security and isolate credit risks. Since OES providers are not in the United States, the risk of U.S. censorship is avoided. Compared with the traditional method of holding funds through exchanges or U.S. custodians, Ethena's approach reduces censorship risks and adapts to the current global regulatory environment.
Economic benefits
The revenue generated by the ENA protocol comes from two sources:
1. Staking asset consensus and execution layer rewards (mainly ETH staking income)
2. Funding and Basis from Delta Hedging Derivatives Positions
From a historical perspective, due to the imbalance between supply and demand of digital assets, participants with short delta exposure have been able to obtain positive financing rates and basis. For USDe holders, even if they do not trade, they can obtain sUSDE by staking USDe, and recover the original USDe and staking income when the pledge is canceled in the future. This design not only attracts participants who need leverage, but also encourages ETH holders to participate, thereby increasing USDe liquidity in the web3 ecosystem.
2.2 Risk Response
Although decentralized stablecoins are good, there are also some risks that must be taken seriously and considered. The advantage of ENA is that these risks are taken into consideration at the beginning of the design of the entire technical solution, and the possibility of risks is resolved or reduced as much as possible. Let’s take a look at it in detail.
Financing risks
“Funding risk” relates to the possibility of persistent negative funding rates. Ethena is able to earn income from funding, but may also need to pay funding fees. While this poses a direct risk to protocol returns, data shows that negative returns tend not to last long and quickly return to a positive mean.
Negative funding rates are a feature of the system, not a bug. USDe was built with this in mind. So Ethena has set up a reserve fund that will step in when the combined yield between LST assets (such as stETH) and the funding rate of short-term perpetual positions is negative. This is designed to protect the spot support that supports USDe. Ethena will not pass on any "negative yields" to users who pledge USDe as sUSDe.
Using LST collateral (such as stETH) as collateral for USDe can also provide an additional safety margin for negative financing (stETH can obtain an annualized yield of 3-5%), that is, the protocol yield will only be negative when the sum of the LST yield and the funding rate is negative.
Liquidation risk
The liquidation risk mentioned here refers to the risk of forced liquidation caused by insufficient margin in centralized exchanges during Delta neutral hedging. For Ethena, derivatives trading is only for delta neutral hedging, the leverage is not high, and the probability of liquidation risk is small. Although Ethena's margin on the exchange is composed of two assets, ETH spot and stETH (stETH accounts for no more than 50%), since the Ethereum network has upgraded Shapella, one of the functions is to allow users to cancel the pledge of their stETH, and the stETH/ETH discount has never exceeded 0.3%. In other words, the value of stETH is almost exactly the same as the spot value of ETH.
In addition, Ethena has also made the following arrangements to ensure that liquidation risks can be well dealt with in extreme situations:
1. Once any risk situation occurs, Ethena will systematically entrust additional collateral to improve the margin status of hedge positions.
2. Ethena is able to temporarily cycle delegated collateral between exchanges to support specific situations.
3. Ethena has access to a reserve fund that can be quickly deployed to support the exchange’s hedging positions.
4. If an extreme situation occurs, such as a serious smart contract defect in the pledged Ethereum assets, Ethena will immediately reduce the risk and protect the value of the supporting assets. This includes closing hedging derivatives to avoid liquidation risk becoming a problem, and disposing of the affected assets for another asset.
Custody Risk
Because Ethena relies on “over-the-counter settlement” (OES) providers to hold protocol-backed assets, there is a certain dependency on their ability to operate, which is what we refer to as “custodian risk”. The custodian’s business model is built on asset protection rather than leaving collateral on a centralized exchange.
There are three main risks of using an OES provider for hosting:
1. Accessibility and usability. Ethena is able to deposit, withdraw, and delegate to exchanges. Any unavailability or degradation of these features will hinder the transaction workflow and the availability of the minting/exchanging USDe function. It is worth noting that this will not affect the value of the backing USDe.
2. Perform operational duties. If an exchange fails, OES transfers any unrealized PnL risk with the exchange’s rapid transfer. Ethena reduces this risk by frequently settling PnL with exchanges. For example, Copper’s Clearloop settles PnL between exchange partners and Ethena on a daily basis.
3. Custodian operational failure. While there has not yet been any major operational failure or bankruptcy of a large cryptocurrency custodian, it is a real possibility. Although assets are held in separate accounts, a custodian bankruptcy would cause operational problems for the creation and redemption of USDe, as Ethena is responsible for managing the transfer of assets to other providers. Fortunately, the backing assets do not belong to the custodian, and the custodian or its creditors should not have a legal claim to these assets, because OES providers either use a bankruptcy-isolated trust or an MPC wallet solution.
Ethena mitigates these three risks by not providing too much collateral to a single OES provider and ensuring that concentration risk is managed. Even for the same exchange, there will be multiple OES providers to mitigate the above two risks.
Risk of exchange bankruptcy
First, Ethena diversifies risks and mitigates the potential impact of exchange bankruptcy by working with multiple exchanges;
Second, Ethena retains full control and ownership of its assets through OTC settlement providers and does not need to deposit any collateral with any exchange.
This allows the impact of a particular event on any one exchange to be limited to the outstanding profit or loss between settlement cycles of the OTC clearing provider.
Therefore, if an exchange goes bankrupt, Ethena will entrust the collateral to another exchange and hedge the outstanding delta previously covered by the bankrupt exchange. If an exchange goes bankrupt, the derivative position will be considered closed. Capital preservation is Ethena’s top priority. In extreme cases, Ethena will always strive to protect the value of the collateral and the USDe stable peg (using reserves).
Mortgage risk
“Collateral risk” here refers to the fact that the backing asset (stETH) of USDe is different from the underlying asset (ETH) of the perpetual futures position. The backing asset ETH LSTs is different from the underlying asset ETH of the hedge contract, so Ethena needs to ensure that the price difference between the two assets is as small as possible. As discussed in the liquidation risk section, due to the low leverage and small collateral discount, the impact of stETH decoupling on the hedge position is minimal and the possibility of liquidation is extremely small.
2.3 Business development and competition analysis
ENA has soared in value since its inception, thanks to its strong technical and institutional support, as well as the high returns it offers, which have attracted retail and institutional investors. Binance Launchpool will launch the Ethena (ENA) project and provide mining activities. Binance will then launch ENA trading and open multiple trading pairs. As a decentralized stablecoin, ENA has the advantage of competing with centralized stablecoins such as USDT and USDC. Despite the challenges, its development momentum is rapid and highly anticipated in the industry.
3.1 Team situation
Ethena was founded by Guy Yang, whose idea came from Arthur Hayes' blog post. The core team has five members, each of whom plays an important role in the team.
Guy Young leads the development direction of Ethena as founder and CEO. Conor Ryder serves as the head of research at Ethena Labs. He has extensive research and analysis experience, having worked at Kaiko and graduated from University College Dublin and Gonzaga College.
Elliot Parker is Head of Product Management at Ethena Labs, he was previously Product Manager at Paradigm and holds a degree from the Australian National University. Seraphim Czecker is responsible for business development at Ethena, he was previously Head of Risk at Euler Labs and worked as an emerging markets FX trader at Goldman Sachs.
Finally, Zach Rosenberg serves as the general counsel of Ethena Labs. He previously worked at PwC and has academic backgrounds from Georgetown University, American University Washington College of Law, American University Kogold School of Business, and University of Rochester. Together, these five core members form a strong team at Ethena, providing solid support for the company's development.
3.2 Financing
In July 2023, Ethena completed a US$6.5 million seed round of financing, led by Dragonfly, followed by Deribit, Bybit, OKX Ventures, BitMEX and others.
In February 2024, Ethena received a strategic investment of US$14 million led by Dragonfly, with participation from PayPal Ventures, Binance Labs, Deribit, Gemini Frontier Fund, Kraken Ventures, etc., with a valuation of US$300 million in this round.
4.1 Token Distribution
Total supply: 15 billion
Initial circulation: 1.425 billion
Foundation: 15%, will be used to further promote the popularization of USDe, reduce the crypto world’s dependence on the traditional banking system and centralized stablecoins, and will be used for future development, risk assessment, auditing and other aspects.
Investors: 25% (25% in the first year, unlocked linearly every month thereafter)
Ecosystem development: 30%, this part of the tokens will be used to develop the Ethena ecosystem, of which 5% will be distributed to users as the first round of airdrops, and the rest will support various subsequent Ethena plans and incentive activities. Binance's lanuchpool token activity is one of them, accounting for 2% of the total scale.
Core contributors: 30% (Ethena Labs team and consultants, 25% unlocked in 1 year)
After the launch of Ethena’s governance token, it will immediately launch the “Second Quarter Event” to further expand its token economic model. This event will focus on the development of new products using Bitcoin (BTC) as a supporting asset. This step not only expands USDe’s growth potential, but also brings Ethena a wider market acceptance and application scenarios.
As the core of the second quarter activities, Sats Rewards aims to reward users who participate in the construction of the Ethena ecosystem. By increasing the rewards for early users, Ethena further strengthens the sense of participation and belonging of the community, while also encouraging new users to join. The design of this incentive mechanism demonstrates Ethena's recognition of the importance of building a lasting and active community.
Through a carefully designed token economic model and incentive mechanism, Ethena is committed to building a DeFi platform that is both inclusive and sustainable, exploring new paths for the future of decentralized finance.
4.2 Token Unlock
2024.6.2 unlocked 0.36%;
2024.7.2 unlocked 0.36%;
2024.8.2 unlocked 0.36%;
2024.9.2 unlocked 0.36%;
2024.10.2 unlocked 0.36%;
2025.4.2 Unlocked 13.75% , the proportion is very high and needs special attention.
ENA's circulating market value is 1.4B, while its 𝐹𝐷𝑉 market value is 14𝐵, and its FDV market value is 14B, showing its high market value. As a special type of digital currency, the valuation of stablecoins is usually not too low. In 2023, the scale of stablecoins settled in on-chain transactions has exceeded 12 trillion US dollars, indicating its wide application and acceptance. Once stablecoins are widely recognized by the market, their potential value space will be huge.
AllianceBernstein, a leading global asset management company, predicts that the stablecoin market may reach US$2.8 trillion by 2028. This forecast, compared to the current market capitalization of approximately $140 billion, shows significant growth potential. Even if the market value of stablecoins has declined since reaching a peak of $187 billion, its future growth opportunities are still significant.
Overall, as an important form of digital currency, stablecoin is gradually gaining market recognition and acceptance. It has broad development prospects in the future and huge growth potential.
So how to value ENA?
First of all, there is no valuation object that can be fully referenced. Secondly, the stablecoin market is huge and there is still a lot of room for growth in the future. In such a background, it is difficult to give a definite valuation. What we should consider more is whether Ethena’s solution can solve and adapt to the development needs of web3’s decentralized stablecoins, and whether it can respond to and resolve possible risks.
However, Arthur Hayes, the founder of BitMEX, tried to value ENA using a valuation similar to Ondo. His valuation model is based on the fact that the long-term split will be 80% of the revenue generated by the protocol going to the staked USDe (sUSDe), and 20% of the generated revenue going to the Ethena protocol. The details are as follows:
Ethena protocol annual revenue = total revenue * (1 – 80% * (1 — sUSDe supply / USDe supply));
If 100% of USDe is staked, that is, sUSDe supply = USDe supply: Ethena protocol annual income = total income * 20%;
Total yield = USDe supply * (ETH staking yield + ETH Perp swap funds);
ETH Staking Yield and ETH Perp Swap funds are both variable interest rates.
ETH staking yield – assuming PA yield is 4%.
ETH Perp Swap Funds – Assuming PA is 20%.
A key part of the model is the fully diluted valuation (FDV) of revenue multiples that should be used. Using these multiples as a guide, the potential Ethena FDV was estimated.
At the beginning of March, Ethena generated a 67% yield on $820 million in assets. Assuming a 50% supply ratio of sUSDe to USDe, extrapolating one year later, Ethena's annualized revenue is about $300 million. Using a valuation similar to Ondo gives a FDV of $189 billion.
Therefore, ENA’s growth space = 189/14 = 13.5, which is equivalent to 12.6 in currency price.
Whether analyzed from the perspective of market size or income structure, ENA still has huge room for growth and deserves special attention and investment. How to operate it specifically at the investment operation level? Please see the next chapter.
Since ENA is the currency that is worth investing in for the long term, one way is to buy it now and hold it for a long time; the other mode is to buy it at the right time, and then sell it at the right time, constantly doing swing trading and long-term investment. This chapter will focus on studying and analyzing the second investment method, and give current investment advice, using the chip distribution and MVRV research methods.
Summarize
ENA (Ethena) gives the Web3 world independent currency (stablecoin) issuance and pricing rights, heralding huge growth potential and broad imagination space.
The ENA project is considered to be the most complete decentralized stablecoin project at present, but there is still room for improvement. We expect the project party to continue to update and iterate, use more advanced technologies and methods to resolve potential risks, and further consolidate and enhance the stability and reliability of the project. Overall, ENA has shown an exciting development prospect and deserves investors' attention.
However, the technical side continues to weaken, that is, the rise of the second cake during this period has led to a rebound in ena. However, judging from the current cottage industry, there are indeed many needs for bottoming out and rebounding. Combining the project logic with the benchmarking technology, you can consider building a bottom position!
