Original title: (Revisiting Ethena: After an 80% drop, rebound, is ENA still in the undervalued hitting zone?)
Original author: Alex Xu, Mint Ventures
Ethena is one of the few phenomenal DeFi projects in this cycle, with its token's circulating market value once exceeding $2 billion (corresponding FDV exceeding $23 billion). However, since entering April this year, its token price has dropped rapidly, with Ethena's circulating market value retreating more than 80% from its high, and the token price has retreated as much as 87%.
Since entering September, Ethena has accelerated its cooperation with various projects, expanding the usage scenarios of its stablecoin USDE. The scale of the stablecoin has begun to bottom out and rebound, with its circulating market value rebounding from a low of $400 million in September to around $1 billion now.
In an article I published in early July (Altcoins falling endlessly, or the best time to layout DeFi), I also mentioned Ethena. At that time, my view was:
‘... Ethena's business model (a public fund focused on perpetual contract arbitrage) still has a clear ceiling. The large-scale expansion of its stablecoin (which reached a scale of $3.6 billion at the time) relies on secondary market users being willing to buy its ENA tokens at high prices, providing high returns for USDE. This design, which seems a bit like a Ponzi scheme, is likely to lead to a negative downward spiral for business and token prices when market sentiment is poor. The key point for Ethena's business turning point will be when USDE can truly become a stablecoin with a large number of ‘natural holders,’ completing its transformation from a public arbitrage fund to a stablecoin operator.’
Subsequently, the price of ENA continued to drop by 60%, and even now, the price has rebounded nearly double from the low, but there is still a gap of over 30% from the price at that time.
At this time, I will reassess Ethena, focusing on the following three issues:
1. Current business level: Ethena's current core business metrics, including scale, revenue, comprehensive costs, and actual profit levels.
2. Future business outlook: The promising narrative and future development of Ethena.
3. Valuation level: Is the current price of ENA in the undervalued hitting zone?
This article reflects the author's thoughts at the time of publication, which may change in the future, and the viewpoints are highly subjective. There may also be errors in facts, data, and reasoning logic. Criticism and further discussion from peers and readers are welcome, but this article does not constitute any investment advice.
The following is the main text.
1. Business level: Ethena's current core business situation
1.1 Ethena's business model
Ethena positions itself as a synthetic dollar project with "native yield," meaning its track is alongside MakerDAO (now SKY), Frax, crvUSD (Curve's stablecoin), and GHO (Aave's stablecoin) — all in the stablecoin space.
In my opinion, the business models of stablecoin projects in the cryptocurrency sector are basically similar:
1. Raising funds, issuing debt (stablecoins), and expanding the project's balance sheet.
2. Using the raised funds for financial operations to obtain financial returns.
A project is profitable when the returns from the operating funds exceed the comprehensive costs incurred in raising funds and running the project.
Taking the issuer of the centralized stablecoin project — Tether, as an example, Tether raises US dollars from users, issues debt (USDT) certificates to users, and then invests the raised funds in treasury bonds, commercial papers, and other interest-bearing assets to obtain financial returns. Considering the wide use of USDT, the value in users' minds is equivalent to the US dollar, and it can do many things that traditional dollars cannot do (such as instantaneous cross-border transfers), users are willing to provide US dollars to Tether in exchange for USDT without compensation, and when you want to redeem USDT from Tether, you also need to pay a certain redemption fee.
As a latecomer to the stablecoin project, Ethena is clearly at a disadvantage in network effects and brand credibility compared to established projects like USDT and DAI, which is specifically reflected in its higher fundraising costs. Users are only willing to provide their assets to Ethena in exchange for USDE when there are high yield expectations. Ethena's approach is to incentivize users with project tokens ENA and provide yields from stablecoins (from financial income generated by project operating funds).
1.2 Ethena's core business data
1.2.1 USDE issuance scale and distribution
Data source: https://app.ethena.fi/dashboards/solvency
After the issuance scale of USDE reached a new high of $3.61 billion in early July 2024, its scale continued to fall to $2.41 billion around mid-October, and is currently gradually recovering, reaching about $2.72 billion as of October 31.
Among the more than $2.72 billion in scale, 64% of USDE is in a staked state, currently corresponding to an APY of 13% (official website data).
Data source: https://dune.com/queries/3456058/5807898
It can be seen that most users hold USDE for financial income, with 13% being USDE-denominated "risk-free returns," which is also Ethena's current financial cost for raising user funds.
At the same time, the yield on short-term US treasury bonds was 4.25% (data from October 24), USDT's deposit rate on the largest DeFi lending platform Aave was 3.9%, and USDC was 4.64%.
We can see that, in order to expand its fundraising scale, Ethena is still maintaining a relatively high fundraising cost.
USDE is not only issued on the Ethereum mainnet but is also expanding on multiple L2 and L1 chains. Currently, the scale of USDE issued on other chains is $226 million, accounting for about 8.3% of the total.
Data source: https://dune.com/hashed_official/ethena
Additionally, Bybit, as an investor and important cooperative platform of Ethena, not only supports USDE as margin for derivative trading but also provides a yield rate of up to 20% for USDE deposited on Bybit (reduced to a maximum of 10% in September). Therefore, Bybit is also one of the largest custodians of USDE, currently holding $263 million of USDE (more than $400 million at peak).
Data source: https://dune.com/hashed_official/ethena
1.2.2 Protocol revenue and distribution of underlying assets
Ethena's current protocol revenue sources are three:
1. Revenue from staked ETH in the underlying assets;
2. Income generated from derivative hedging arbitrage funding rates and basis income;
3. Investment income: Held in stablecoin form, earning deposit interest or incentive subsidies, such as rewards for holding USDC in Coinbase's loyalty program (approximately 4.5% annualized) and holding sUSDS (formerly sDAI) in Spark.
According to data approved by Ethena's official from Token terminal, Ethena's revenue has exited last month's low, with October's protocol revenue reaching $10.63 million, a month-on-month increase of 84.5%.
Data source: Tokenterminal, Ethena protocol revenue and revenue allocated to USDE (cost of revenue)
Currently, a portion of the protocol revenue is allocated to USDE stakers, while another part will enter the protocol's reserve fund, used to cope with expenses when the funding rate is negative and various risk events.
In the official documentation, it says, "The amount of protocol revenue used for the reserve fund needs to be decided by governance." However, I have not found any specific proposals regarding the reserve allocation ratio on the official forum, and changes in the specific ratio have only been announced in the official blog at the beginning. The actual situation is that the distribution ratio and logic of Ethena's protocol revenue have undergone multiple adjustments after the launch. During the adjustment process, the official initially listens to community opinions, but the specific distribution plan is still subjectively decided by the official and has not gone through a formal governance process.
From the data of Token terminal shown in the above chart, it can also be seen that the division ratio of Ethena's income between USDE staker income (the red bar in the above chart, i.e., cost of revenue) and the reserve fund has been very volatile.
In the early stages of the project, when protocol revenue was high, most of the protocol revenue was allocated to the reserve fund, with 86.7% of the protocol revenue allocated to the reserve fund account in the week of March 11. However, after entering April, as the price of ENA began to drop rapidly, the income from ENA tokens was insufficient to stimulate demand for USDE. To stabilize the scale of USDE, the distribution of Ethena's protocol revenue began to tilt towards USDE stakers, with most of the income allocated to USDE staker users. It was not until the last two weeks that Ethena's weekly protocol revenue significantly exceeded the expenditures allocated to USDE staker users (excluding ENA token incentives).
Ethena's underlying asset situation, data source: https://app.ethena.fi/dashboards/transparency
From the perspective of Ethena's current underlying assets, 52% is BTC arbitrage positions, 21% is ETH arbitrage positions, 11% is ETH staking asset arbitrage positions, and the remaining 16% is in stablecoins. Therefore, Ethena's main source of income currently comes from BTC-dominated arbitrage positions, while the previously emphasized ETH staking income contributes very little due to its small asset proportion.
Quarterly average yield rates for BTC and ETH perpetual contracts, data source: https://app.ethena.fi/dashboards/hedging
From the trend of average yield rates for BTC perpetual contract arbitrage, the average yield rate for the fourth quarter has exited the low range of the third quarter and has returned to the level of the second quarter this year. The average annualized yield rate for this quarter so far is over 8%, but even during the market downturn in the third quarter, the overall average annualized yield rate for BTC arbitrage was still above 5%.
The annualized yield rate for ETH perpetual contract arbitrage is also similar to BTC, currently back to over 8%.
Let's take a look at the market contract scale of Sol, which is about to be included as Ethena's underlying asset. Even though Sol's price has risen this year, leading to a significant increase in Sol's contract positions, currently reaching $3.4 billion, it still lags behind ETH's $14 billion and BTC's $43 billion (excluding CME data).
Trends in SOL contract positions, data source: Coinglass
Regarding the funding costs of SOL, from the largest positions at Binance and Bybit, their recent annualized funding rates are similar to BTC and ETH, currently around 11%.
Current mainstream cryptocurrencies' annualized funding rates Data source: https://www.coinglass.com/zh/FundingRate
In other words, even if SOL is subsequently included as a target for Ethena's contract arbitrage, its scale and yield do not have significant advantages compared to BTC and ETH, so it cannot bring in much incremental income in the short term.
1.2.3 Ethena's protocol expenditures and profit levels
Ethena's protocol expenditures are divided into two categories:
1. Financial expenditures, paid in USDE, target USDE stakers, with income sourced from Ethena's protocol revenue (derivative arbitrage and ETH staking, as well as stablecoin investment).
2. Marketing expenses, paid in ENA tokens, targeted at users participating in various growth activities (Campaigns) of Ethena. These users earn points by participating in activities (different phases of the Campaign have different point names, such as initially called Shards, later called Sats), and after each seasonal activity ends, they exchange points for corresponding ENA token rewards.
Financial expenditures are relatively easy to understand. For users staking USDE, they have clear yield expectations, and the official homepage has clearly stated the current yield rate of USDE:
The current yield rate for USDE staking is 13% Source: https://ethena.fi/
The complexity lies in the continuous various marketing campaigns launched by Ethena since its project launch. They have different rules, added a points incentive mechanism for specific user behaviors, and involved a weighting mechanism, encompassing comprehensive calculations of activities across multiple cooperative platforms.
Let us briefly review a series of growth activities after Ethena's launch:
1. Ethena Shard Campaign: Epoch 1-2 (Season 1)
Time: February 19, 2024, to April 1 (less than a month and a half)
Main incentive actions: Providing stablecoin liquidity for USDE on Curve.
Secondary incentive actions: Minting USDE, holding sUSDE, depositing USDE and sUSDE into Pendle, holding USDE on various cooperative L2s.
Scale growth: During this period, the scale of USDE grew from less than $300 million to $1.3 billion.
The amount of ENA spent, namely the active marketing expenditure: a total of $750 million, accounting for 5%. Among the top 2000 wallets, ENA can instantly receive 50%, and the remaining 50% will be linearly distributed over the next 6 months. Other smaller wallets have no unlocking restrictions. According to the Dune dashboard data created by @sankin, nearly 500 million ENA has been claimed over the 6 months, and before June, the highest price of ENA was about $1.5, the lowest about $0.67, averaging around $1; after the beginning of June, ENA began to drop rapidly from $1, reaching a low of about $0.2, with an average price of $0.6, and the remaining 250 million ENA was basically claimed during this period.
We can roughly estimate that the corresponding value of 750 million ENA is =5*1+2.5*0.6, approximately $650 million.
In other words, the scale of USDE has grown by about $1 billion in less than 2 months, with corresponding marketing expenses reaching $650 million, not including the financial expenses paid for USDE.
Of course, as the first airdrop of ENA, the massive marketing expenditure at this stage is special.
2. Ethena Sats Campaign: Season 2
Time: April 2, 2024, to September 2 (less than 5 months)
Main incentive actions: Locking up ENA, providing liquidity for USDE, using USDE as collateral for borrowing, depositing USDE into Pendle, depositing USDE into Restaking protocol, and depositing USDE into Bybit.
Secondary incentive actions: Locking up USDE on the official platform, holding and using USDE on cooperative L2s, using sUSDE as collateral for borrowing, etc.
Scale growth: During this period, the scale of USDE has grown from $1.3 billion to $2.8 billion.
The amount of ENA spent, namely the marketing expenses: as with the first season, the total rewards for the second season are also 5%, meaning that 750 million ENA (of which the top 2000 wallets receiving the most airdrop also face 50% TGE and subsequent unlocking lasting up to 6 months). Based on the current price of ENA at $0.35, the corresponding value of 750 million ENA is about $260 million.
3. Ethena Sats Campaign: Season 3
Time: September 2, 2024, to March 23, 2025 (less than 7 months)
Main incentive actions: Locking up ENA, holding USDE in officially designated cooperative protocols (mainly DEX and lending), depositing USDE into Pendle.
Scale growth: So far, despite the plans for the third quarter, the scale growth of USDE has encountered bottlenecks, with the current scale of USDE being about $2.72 billion, slightly down from $2.8 billion at the start of the third quarter.
The amount of ENA spent: Considering that the third quarter is nearly 7 months long, longer than the second quarter, and that the ENA reward incentives are likely to continue to decrease, the total incentive amount for the third quarter is expected to remain at 5%, meaning that 750 million is quite likely.
Thus, we can make a rough calculation of Ethena's total protocol expenditures from its launch this year until now (October 31):
Financial expenditures (paid in stablecoins to USDE stakers): $81.647 million
Marketing expenditures (paid in the form of ENA tokens to participating users): $650 million + $260 million = $910 million (this does not yet account for potential expenditures after September).
Ethena's quarterly protocol revenue and financial expenditure trends, source: tokenterminal.
And during the same period, the total protocol revenue was $124 million.
In other words, contrary to the impression that "Ethena is very profitable," Ethena's income has reached a net loss of $868 million this year by the end of October after deducting financial and marketing expenses. Here, I have not yet considered ENA token expenditures from September to October, so the actual loss amount may be higher than this figure.
An $868 million net loss is the price for USDE's market value scale reaching $2.7 billion within a year.
In fact, like many DeFi projects in the previous cycle, Ethena is taking the route of raising core business metrics and increasing protocol revenue through token subsidies. However, Ethena has adopted a unique point system in this round, delaying the issuance of tokens and involving more partners as channels for participation, making it difficult for participating users to intuitively assess their final financial returns from participating in Ethena's activities, which in a sense enhances user stickiness.
2. Future business outlook: The promising narrative and future development of Ethena.
In the past two months, ENA has achieved a rebound of nearly 100% from its low, and this occurred while ENA opened for Season 2 rewards collection in early October. These two months were also densely packed with Ethena news and positive developments, such as:
October 28: The on-chain options and perpetual contract project Derive (formerly Lyra) will include sUSDE as collateral.
October 25: USDE was included by Wintermute as collateral for OTC trading.
October 17: Ethena proposed to integrate Ethena's liquidity and hedging engine into Hyperliquid.
October 14: Ethena community initiates a proposal to include SOL as an underlying asset of USDE.
September 30: The first project of the Ethena ecosystem network was launched, the derivatives exchange Ethereal, which promised a 15% token airdrop to ENA users. Subsequently, Ethena Network announced that it would release more information about the launch timetable for more products in the coming weeks and more details about new ecosystem applications based on USDE.
September 26: Plan to launch USTB — the so-called "new stablecoin launched in cooperation with BlackRock". In fact, USTB is a stablecoin with BlackRock's issued on-chain treasury bond token BUILD as the underlying asset, having limited direct relations with BlackRock.
September 4: In cooperation with Etherfi and Eigenlayer, the first stablecoin AVS collateral asset — eUSD was launched, available by depositing USDE in etherfi, and eUSD went live on September 25.
It can be said that in these two months, the scenarios for USDE and sUSDE have increased quite a bit, although the demand stimulus for USDE may not be obvious, such as the stablecoin AVS launched in cooperation with Etherfi and Eigenlayer, with collateral assets eUSD currently only scaling to a few million.
In fact, the real catalyst for the recent surge in ENA prices was a strong shout-out article on Ethena by well-known trader and crypto KOL Eugene @0xENAS published on October 12: (Ethena: The Trillion Dollar Crypto Opportunity).
This article, which has been shared nearly 400 times, liked over 1800 times, and viewed over 700,000 times, led to ENA's price rising from $0.27 to $0.41 within 4 days, an increase of over 50%.
In the article, Eugene not only reviewed some of Ethena's product features but also emphasized three reasons. However, in my opinion, aside from the first reason, the other two reasons are full of points of contention:
1. The US interest rate cut has led to a decline in global risk-free rates, making USDE's APY appear more attractive, attracting more capital inflow.
2. The newly launched USTB stablecoin, in cooperation with BlackRock, is an "absolute gamechanger," which will greatly increase the adoption of USDE, as USDE can switch its underlying assets to USTB for risk-free returns on treasury bonds when the market's perpetual arbitrage yield is negative.
Point of contention: USTB, based on BUILD as the underlying asset, does not equate to USTB being a stablecoin jointly launched by BlackRock and Ethena, just like Dai's underlying assets include a significant amount of USDC, but Dai is not a stablecoin jointly launched by Circle and MakerDAO. In fact, for USDE to earn treasury bond returns during negative perpetual yields, one can simply close positions and allocate to Build or sDAI, or exchange for USDC to earn a 4.5% annualized subsidy on Coinbase, without needing to issue another USTB to hold. USTB is more like a gimmick product to ride on BlackRock's traffic, and calling such a mediocre product an "absolute gamechanger" raises doubts about the author's understanding or writing motives.
3. Future ENA emission rates will decrease, resulting in a rapid reduction in selling pressure compared to before.
Point of contention: In fact, the rewards for Season 2 still have a total of 5% of ENA, meaning that 750 million tokens will enter circulation over the next 6 months, which is not much less than the total incentive of the previous season. Moreover, in March next year, ENA will face a massive unlocking for the team and investors, and the inflation expectations for ENA in the next six months are not optimistic.
However, there are still exciting stories for Ethena in the coming months to a year.
First, with the rising expectations of Trump coming to power and the Republican victory (results can be seen in a few days), the warm-up of the crypto market benefits the rise of BTC and ETH's perpetual arbitrage yields and scale, increasing Ethena's protocol revenue.
Second, after the emergence of more projects within the Ethena ecosystem following Ethereal, it will increase the airdrop income for ENA.
Third, the launch of Ethena's self-operated public chain can also bring attention to ENA and nominal scenarios like staking, but I expect this will only be launched after accumulating more projects on the second chain.
However, what is most important for Ethena is that USDE can be accepted as collateral and trading assets by more leading CEXs.
At leading exchanges, Bybit has already established deep cooperation with Ethena.
Coinbase has its own USDC to operate, and considering the complexity of regulation as an American company, the possibility of it supporting USDE as collateral and stablecoin trading pairs is basically zero.
Meanwhile, among the major exchanges Binance and OKX, the possibility of OKX including USDE in stablecoin trading pairs and contract collateral is present because it participated in two rounds of Ethena financing, which has a certain financial interest alignment. However, this possibility is not very large, as this action would also expose OKX to operational and endorsement risks related to Ethena. Compared to OKX, Binance, which only participated in one round of Ethena's investment, is even less likely to include USDE in stablecoin trading pairs and collateral, as Binance itself also supports its own stablecoin project.
The belief that USDE will become the contract margin asset for major exchanges is also one of the reasons Eugene favored Ethena in a previous article, but I am not optimistic about this.
3. Valuation level: Is the current price of ENA in the undervalued hitting zone?
We analyze ENA's current valuation situation from both qualitative analysis and quantitative comparison.
3.1 Qualitative analysis
Events in the next few months that are favorable for ENA token prices and likely to occur include:
· The rise in arbitrage profits brought by the recovery of the crypto market is reflected in the improvement of protocol revenue expectations, causing ENA prices to rise and promoting the growth of USDE scale.
· Including SOL as an underlying asset can attract the attention of SOL ecosystem investors and project parties.
· The Ethena ecosystem may see more projects similar to Ethereal in the coming months, bringing more airdrops for ENA.
· Before the next wave of ENA unlocking, the project team has the motive to raise the token price, to facilitate an upward spiral of business and token prices, and to provide themselves with higher selling prices.
Moreover, from the performance of Ethena since its launch for more than half a year, the project team's business capabilities are very strong. It can be said that it is currently the best among many stablecoin projects in terms of external cooperation expansion, more aggressive and efficient than the leading stablecoin project MakerDAO.
Currently unfavorable factors suppressing ENA token value include:
· ENA lacks genuine profit distribution, with more floating staking scenarios (such as guaranteeing Ethena's multi-chain security as AVS asset) and self-mining.
· The actual profitability situation of the Ethena project is poor. The massive subsidies implemented to open up the market have led to severe net losses for the project, and this part of the loss is actually borne by ENA token holders.
· ENA will still face significant inflation pressure in the next half year, partly due to expenditures in marketing activities involving ENA tokens, and also facing the unlocking of core team and investors after a year in late March next year. According to tokenomist data, ENA tokens will face inflation pressure of 85.4% of the current circulating supply in the next 6 months.
Data source: https://tokenomist.ai/
3.2 Quantitative comparison
Ethena's business model is actually no different from other stablecoin projects. Its innovation lies in the use of raised assets, specifically profiting from raising funds through perpetual contract arbitrage.
Therefore, we will use MakerDAO (now SKY), the currently largest circulating market valuation stablecoin project, as a benchmark for valuation comparison.
It can be seen that compared to the established protocol MakerDAO, Ethena's token ENA currently lacks cost-effectiveness in terms of protocol revenue or profits.
Summary
Although many people regard Ethena as a representative innovative project of this cycle, its core business model is no different from other stablecoin projects, which all raise funds for financial operations and strive to promote the use and acceptance of their bonds (stablecoins) to minimize their fundraising costs.
At the current stage, Ethena, which is in the early promotion phase of stablecoins, is still in a phase of huge losses, contrary to what many KOLs say about it being a "very profitable project." Its valuation is not underestimated compared to the representative stablecoin project MakerDAO.
However, as a new player in this space, Ethena has demonstrated very strong business expansion capabilities, being more aggressive than other projects. Like many DeFi projects in the previous cycle, rapid scale expansion and more project adoption will enhance investors' and researchers' optimistic expectations for the project, thus boosting token prices. Rising token prices will lead to higher APY, further increasing the scale of USDE, forming a self-reinforcing upward spiral.
Then, such projects will eventually face a critical point, where people begin to realize that the project's growth is driven by token subsidies, and the price increase of the issued tokens seems to be supported only by optimistic sentiment, lacking a value link.
Thus, a fast-paced game has begun.
Only a few projects can rise from such a downward spiral. The previous cycle's stablecoin star Luna (UST issuer) has already been buried, Frax's business has shrunk significantly, and Fei has ceased operations.
As a product with a clear Lindy effect (the longer it exists, the stronger its vitality), Ethena and its USDE still need more time to validate the stability of their product architecture and their survival ability after subsidies decline.
Reference materials and data sources:
Asset prices: https://www.coingecko.com/
Token unlock information: https://tokenomist.ai/
Financial data: https://tokenterminal.com/
Project data dashboard: https://app.ethena.fi/dashboards/transparency
Official announcement: https://mirror.xyz/0xF99d0E4E3435cc9C9868D1C6274DfaB3e2721341
KOL Eugene's article: https://x.com/0xENAS/status/1844756962854212024
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