Source: Four Pillars; Translated by Baishui, Golden Finance
Summary
The SEC is expected to approve spot Ethereum, which could bring in up to $5 billion in inflows in the first six months.
The approval of an Ethereum ETF could increase the yield on Ethena’s synthetic dollar sUSDe, just as it did after the approval of a Bitcoin ETF.
Ethena’s products had risks associated with funding rate volatility, liquidity challenges, and potential vulnerabilities in smart contracts and custodial operations. However, these issues have now been well addressed in a transparent manner.
Ethena plans to enhance the utility of its ENA token and is preparing to launch its Ethena Appchain.
2024 is a unique year for the crypto industry. From the institutional side, the year started with the approval of a Bitcoin ETF. This allows traditional investors to gain exposure to Bitcoin's price action through a regulated financial product traded on an established stock exchange, without having to directly own or manage cryptocurrencies. This is a factor that brings positive sentiment to the market, leading to growth in the cryptocurrency market cap.
In crypto, the trend is to launch your own Rollup and memecoin. Compared to the last bull cycle, there are not many significant new primitives built and used by crypto users. However, in the field of DeFi dapps, Ethena stands out. Ethena's synthetic dollar USDe became the fastest crypto dollar to reach $3 billion, surpassing the records of DAI and USDC. Many factors contributed to this success, including its unforkable architecture, unique business model, and sustainable yield opportunities.
Looking at the current situation, one of the biggest market focuses is the expected approval of the Ethereum ETF, which is expected to be announced in July this year. The approval of the Ethereum ETF may bring new liquidity to the Ethereum ecosystem, which will bring other opportunities. Second wave factors may bring new opportunities for Ethena's products (USDe, sUSDe, and ENA). In this article, let's explore the current sentiment of the Ethereum ETF and what this means for Ethena.
1. Current status of Ethereum ETF and estimated inflow
So, how is Ethereum currently viewed? Prior to May 2024, there was a lot of skepticism and uncertainty surrounding Ethereum ETFs. This uncertainty was sparked by the SEC’s historical reluctance to approve cryptocurrency ETFs, especially those tied to altcoins like Ethereum. As of July 2024, the SEC has taken steps to approve a spot Ethereum ETF. Following its approval of a Bitcoin spot ETF earlier this year, the SEC approved a rule change in May 2024 that would allow exchanges to list spot Ethereum ETFs. Several asset managers, including BlackRock, Bitwise, and Fidelity, have submitted applications for these products. The spot ETF is likely to begin trading on July 23.
Source: Ethereum ETF Market Size | Galaxy
1.1 Estimation of inflow after approval
Source: Galaxy Digital, CoinDesk, Crypto Adventure, CryptoSlate, CoinDesk, Cointelegraph, The Block, Investing.com
It is difficult to estimate Ethereum inflows because Ethereum ETF market dynamics are affected by factors different from Bitcoin, such as a large portion of ETH is locked in staking, bridges, and smart contracts, which may amplify ETH's price sensitivity. As the asset becomes more accessible to retail investors, this demand is expected to drive early inflows, and institutional interest will grow as accessibility to wealth management platforms increases. However, the lack of staking rewards may reduce some of the appeal.
Cryptocurrency exchange Gemini predicts that the spot Ethereum ETF could see up to $5 billion in net inflows in the first six months of trading. On the other hand, JPMorgan analysts are more conservative in their estimates, predicting net inflows of $3 billion in 2024. Many analysts use the performance of Bitcoin ETFs as a benchmark, estimating inflows of between 15% and 50%. Bitcoin ETFs attracted $15.1 billion in net inflows in the first five months of trading.
There is also debate over whether the approval of an Ethereum ETF would have as significant an impact on ETH prices as a Bitcoin ETF did on BTC. Some analysts believe the effect could be much more muted due to current market conditions and investor saturation. Ilan Solot, co-head of digital assets at Marex Solutions, said: “Ubiquitous pessimism is a strong basis for outperformance. The same is true for sell-the-news strategies, which many will try to replicate from BTC ETFs. However, I am concerned that many inflow forecasts may be over-benchmarked by comparison to BTC ETF numbers.”
2. Ethereum ETF approval brings opportunities for sUSDe
Approval of a spot Ethereum ETF could make sUSDe an attractive option for investors, similar to the recent experience of Bitcoin ETF approval. Additionally, the approval could bring more institutional capital to the Ethereum ecosystem, potentially increasing demand for USD-denominated yield-generating assets such as sUSDe. As a synthetic dollar that offers a high yield, sUSDe could become an attractive option for investors who want to maintain USD exposure while benefiting from Ethereum market growth.
As a complementary investment strategy to Ethereum ETF exposure, sUSDe can be a good choice. Let’s first look at what happened during the last Bitcoin ETF approval period and examine how sUSDe yield works and potential influencing factors.
2.1 Review of the time when Bitcoin ETF was approved
The approval of a Bitcoin ETF has had a profound impact on the market, pushing up prices and raising funding rates. As more traders take on long positions in anticipation of higher prices, funding rates, which are periodic payments between long and short positions in the futures market, have risen sharply. These rates are affected by the supply and demand dynamics of the underlying asset.
Prior to the ETF’s approval, funding rates were relatively stable, hovering around 10%. However, after approval, these rates spiked dramatically, reaching as high as 50% annualized. Similarly, the approval of an Ethereum ETF could drive up funding rates for ETH perpetual futures, benefiting sUSDe holders, as the token’s yields derive in part from these funding rates.
In addition, the price of Bitcoin has also risen since its approval. This chart shows the correlation between the price of Bitcoin and the annualized funding rate of perpetual futures contracts from July 2023 to July 2024. The data shows that both the price of Bitcoin and the funding rate rose sharply after the ETF was approved. The SEC approved the Bitcoin ETF on January 10, 2024, which led to a sharp surge in the price of Bitcoin, climbing from about $40,000 to nearly $80,000 in a few months.
After the approval of the Bitcoin ETF, USD-denominated assets such as Ethena USDe rose to prominence. These assets offer stability and attractive yields, making them ideal collateral for DeFi platforms. For example, sUSDe's yield surged to over 30% after the ETF was approved, highlighting its growing appeal among investors seeking stable and high-yielding assets. Let's take a look at how this yield works and what are the potential factors that may affect the yield.
2.2 Potential impact on sUSDe yield
Ethena's synthetic dollar token USDe became a particularly attractive option after the Bitcoin ETF was approved. By taking advantage of increased market activity and higher funding rates, USDe was able to generate returns of up to 30% after the ETF was approved. This impressive return was achieved through a variety of strategies, including delta hedging of staked Ethereum collateral and exploiting the widening spread between spot and futures markets through its basis arbitrage. Let's look at how it works and why an Ethereum ETF can influence this return.
2.2.1 How does sUSDe generate income?
Source: Yield Explanation | Ethena Labs
The yield mechanism for sUSDe (Staked USDe) in the Ethena protocol works through a "Token Vault" system with rewards, similar to other staking tokens such as Rocketpool's rETH. When users stake their USDe, they receive sUSDe tokens, which represent a fractional stake in the total USDe held in the staking contract.
The protocol generates yield from two main sources: staking rewards for holding assets like stETH as collateral, and funding and basis from delta-hedged derivative positions. This yield is then distributed to sUSDe holders through the increase in the value of sUSDe relative to USDe over time. Importantly, the protocol ensures that the value of sUSDe can only increase or remain stable, and any potential losses are covered by Ethena's insurance fund. (However, coverage by the insurance fund is currently only around 1%.) Users do not need to take any additional action to receive yield; simply hold sUSDe to benefit from the returns generated by the protocol.
2.2.2 Ethereum ETF and sUSDe Yield
One of the key factors driving sUSDe’s yield higher is the persistence of base and funding rates in the perpetual futures market. With the approval of the Ethereum ETF, it is expected that demand for perpetual contracts will increase as institutional investors may seek exposure to Ethereum through various financial instruments. This increase in demand could lead to a sustained positive funding rate environment, benefiting sUSDe holders, who may receive additional income from these funding payments.
As more spot volumes move to regulated ETFs, the lag in spot demand on offshore exchanges could create interesting arbitrage opportunities. This scenario could lead to a sustained basis between spot and futures prices, which traders could exploit and potentially result in higher yields for sUSDe holders. Additionally, positive sentiment following ETF approval could push up funding rates, further increasing sUSDe’s earnings potential. Historical data shows that funding rates tend to rise during periods of positive sentiment.
However, it is important to note that market dynamics can be complex and unpredictable and actual results may vary depending on a number of factors.
Source: Ethereum: Funding Rate - All Exchanges | CryptoQuant
3. Risks of Use and sUEDE
Ethena has grown in a short period of time, surpassing previous records of other cryptocurrencies. It was the fastest cryptocurrency to reach $3 billion, taking only about 200 days. This raises the question: will this growth continue? What are the risks? In this section, let's take a look at some of these risks.
3.1 Funding Rate and Liquidity Risk
Source: App | Ethena
Ethena faces risks associated with funding rates and liquidity. If short positions outnumber long positions, the funding rate could become negative, causing the protocol to lose money. If the funding rate becomes negative, the protocol will need to pay a large amount to long positions, which could deplete the reserve fund (insurance fund). According to Ethena's research, the total yield on stETH and short ETH funding was positive on 89% of the days, but negative on 11% of the days.
This situation may become more difficult to manage as USDe's market capitalization grows too large, making it difficult to maintain its delta-neutral position and tap into the reserve fund. In addition, liquidity risk arises if the underlying derivatives market is illiquid. This could affect USDe's stability and the total returns distributed to stakers. For example, if liquidity on centralized exchanges declines during a market downturn, Ethena may have difficulty rebalancing its positions.
3.2 Risks of Escrow and Smart Contracts
Source: Solution: Internet Bonds | Ethena Labs
Ethena is also exposed to custody and smart contract risks. The protocol relies on external platforms, such as centralized exchanges and over-the-counter settlement (OES) providers, which pose potential risks stemming from their operational or security vulnerabilities. If these platforms face bankruptcy or operational issues, it will affect Ethena's ability to execute trades and maintain its delta-neutral position. However, if a centralized exchange goes bankrupt, Ethena's perpetual position will be closed, but the collateral assets themselves should be safe because they were not on the exchange in the first place.
Additionally, smart contract vulnerabilities or bugs could lead to unintended consequences or be exploited. While Ethena has implemented measures to mitigate these risks, such as using multiple providers and proactive monitoring, they remain a significant concern.
3.3 Risks of Ethena
As Ethena research director Conor Ryder said, Ethena has potential risks, but it is one of the projects that has been publicly researched and has built a real-time dashboard to publicize the status of Ethena.
These dashboards, accessible on the Ethena website and other platforms such as Dune Analytics and DefiLlama, provide real-time information on custodial wallet holdings, exchange subaccount positions, on-chain wallet assets, USDe supply, and key USDe and sUSDe metrics. The position dashboard displays details on collateral assets, derivative positions for delta hedging, and USDe in circulation. (Some information is not accessible on other platforms.)
Ethena head of research Conor Ryder also said: “To be clear, USDe is not safer or better than any other project - we just provide a risk profile that is unrelated to other DeFi.”
4. $ENA, the driving force behind USDe
Ethena launched its governance token ENA on April 2, 2024. The launch of the ENA token marks a milestone in Ethena's journey towards decentralization and community governance. As part of the launch, Ethena distributed 750 million ENA tokens, 5% of the total supply of 15 billion, to early ecosystem contributors and participants in its "Shard Campaign".
Ethena is now incentivizing participants to participate in the Ethena ecosystem. It previously ran the Season 1 “Shards” campaign for the launch of the ENA token in early April 2024. Ethena is currently in the Season 2 “Sats” campaign, which will end on September 2, 2024. This campaign incentivizes participants to earn Sats through strategies involving Pendle and Morpho, with a total token allocation commitment of 15-20% across all points campaigns.
ENA's token economics is designed to balance incentivizing contributors and maintaining an active ecosystem. Core contributors hold 30% of the token allocation, investors hold 25%, the Ethena Foundation holds 15%, and the remaining 30% is used for ecosystem development, including airdrops and new project financing.
Source: ENA Token Launch — Ethena Labs
Like many utility tokens, $ENA is the governance token of the Ethena protocol, allowing holders to make decisions on a variety of matters, including deciding USDe collateral assets (modification or addition), decisions about custodian entities (OES providers), cross-chain implementation, authorization, which exchanges to use, and choosing a risk management framework.
However, the current ENA token does not have much utility at the moment. Although Ethena’s TVL has grown rapidly and has become one of the top projects generating a lot of revenue, this is not currently shared with token holders.
This will change a lot in the upcoming Ethena development. Ethena will not be just another DeFi project. It has a roadmap that will make $ENA more opportunistic, the two opportunities being potential revenue sharing and the Ethena Appchain.
4.1 Potential Revenue Sharing
Source: Token Terminal [Date: Week commencing Monday, May 27, 2024]
Ethena’s revenue grew significantly, and its synthetic USDe became the fourth largest stablecoin by market cap. Here are some highlights about Ethena’s revenue growth:
Revenue Lead: In the last week of May, Ethena’s USDe generated $7 million in revenue, surpassing Solana’s $6.3 million. Only Tron and Ethereum’s DApp revenues exceeded it.
Market Cap: USDe’s market cap has surpassed $3 billion, making it the fastest growing crypto-dollar asset in crypto history.
Revenue Forecast: According to Token Terminal, Ethena is expected to generate a staggering $222.5 million in revenue over the next 12 months.
Since the ENA token is the governance token of the Ethena protocol, token holders may have the opportunity to vote on proposals that may include revenue distribution mechanisms. This may allow ENA holders to influence decisions on how protocol revenue is distributed, which may include returning a portion of the revenue generated by USDe staking or other protocol activities to token holders.
4.2 ENA Application Chain and Re-staking
Recently, Ethena announced an update to the ENA token roadmap and the introduction of new initiatives for the ENA token economics. Ethena is launching a staking feature for ENA, which will provide security for cross-chain transfers and integrate ENA into its financial infrastructure, including the upcoming Ethena Appchain. In addition, a new requirement requires users to lock up at least 50% of claimable tokens to incentivize long-term cooperation among ENA holders. This move is part of a broader strategy to ensure ecosystem stability and growth.
Source: $ENA Token Economics Update — Ethena Labs
The protocol introduces universal restaking of ENA and the potential for rewards for ENA restaking pools within Symbiotic. The introduction of universal restaking pools marks an expansion of ENA’s utility. These pools will leverage the LayerZero DVN messaging system to provide economic guarantees for cross-chain transfers of USDe. The initiative is part of the broader Ethena Appchain development, which aims to build financial applications and infrastructure using USDe as the primary asset. ENA staked in these pools will receive a variety of rewards, including high multipliers, Symbiotic points, and potential future distributions from LayerZero.
Going forward, ENA’s utility will expand significantly. The Ethena roadmap outlines plans to integrate ENA into a variety of financial applications and infrastructure solutions on the Ethena Appchain. These include spot DEXs, perpetual decentralized exchanges, yield trading platforms, money markets, and low-collateral lending protocols. Additionally, ENA can play a role in on-chain prime brokerage services, options, and structured products. Such a wide range of applications will not only enhance ENA’s utility, but also drive its demand as the ecosystem grows.
5. Looking to the future
Source: X (@leptokurtic_)
The approval of an Ethereum ETF marks a pivotal moment in the cryptocurrency market, similar to the impact of the Bitcoin ETF earlier this year. This development is expected to bring a lot of liquidity and institutional interest to Ethereum, which could affect prices and markets. Ethena, which owns synthetic USDe and yield tokens sUSDe, is well positioned to benefit from these changes. The potential for increased demand for ETH-related financial instruments could drive positive funding rates and create arbitrage opportunities, resulting in higher yields for sUSDe holders. This growth comes after the approval of the Bitcoin ETF.
However, it is critical to recognize the inherent risks that come with such rapid growth and market changes. Ethena must deal with challenges related to funding rate fluctuations, liquidity management, and custody and smart contract vulnerabilities. Despite these risks, the platform's transparent approach to risk management and proactive measures (such as real-time dashboards and use of diverse providers) give it a level of confidence.
USDe has been growing exponentially since its inception, becoming the fastest cryptocurrency to reach a $3 billion market cap. With the approval of an Ethereum ETF, Ethena is expected to grow further. In addition, upcoming initiatives to expand ENA's utility through revenue sharing and Ethena Appchain, among others, may provide additional value and stability. Therefore, it is important to keep an eye out for opportunities.
Appendix A: Ethereum ETF Main Timeline
A.1 January 2024: Paving the way for Bitcoin ETF
In January 2024, the spot Bitcoin ETF was approved, a major milestone that paved the way for altcoin ETFs, with Ethereum being the next possible candidate. The success of Bitcoin ETFs has brought unprecedented net inflows, solidifying BTC's position as a legitimate investment asset. The launch of these Bitcoin tracking funds proved to be one of the largest debuts in ETF history. According to Morningstar Direct, it translated into $8 billion in net inflows. As of the end of June, these nine newly launched products had accumulated $38 billion in assets, proving investors' strong interest in investing in cryptocurrencies through traditional financial instruments.
Source: Bitcoin ETF Flows – Farside Investors
A.2 May 2024: Ethereum ETF gains momentum
In May 2024, the U.S. Securities and Exchange Commission (USEC) made a major rule change, approving applications from major exchanges to list Ethereum spot ETFs. The decision allowed Nasdaq, the New York Stock Exchange, and the Chicago Board Options Exchange (Cboe) to list eight Ethereum ETFs. The SEC's approval came after the applicants amended their application documents to comply with regulatory preferences, specifically removing Ethereum staking from ETF fund operations, which was seen as a potential obstacle to approval.
The rule change requires ETF issuers to update their Form 19b-4, which is used to propose new rules or changes to existing rules for self-regulatory organizations such as stock exchanges. While the SEC approved these forms for eight Ethereum spot ETFs, including those from Bitwise, BlackRock, and VanEck, the issuers still need to get their respective S-1 registration statements approved before they can officially begin trading.
A.3 June 2024: Expectations and Delays
Expectations for the approval of an Ethereum ETF continued to rise in June 2024. SEC Chairman Gary Gensler said the approval process was going smoothly, with some analysts predicting a launch as early as July 4. However, the SEC delayed the launch of the spot Ethereum ETF to mid-July or later.
A.4 July 2024: Delays and uncertainties
The delay in the approval of an Ethereum ETF by July 2024 has created uncertainty among investors. Although some analysts predict that the product will be launched within the next two weeks, the market remains cautious. Bitwise filed an amended S-1 form indicating that the product is close to being ready for listing, but comments from the SEC pushed the timeline back further. Market sentiment is mixed, with some analysts predicting that the price of ETH could fall if the ETF does not generate significant inflows.
A.5 Mid-July 2024: Confirmation imminent
There are reports that a spot Ethereum ETF could begin trading as early as next week. According to people familiar with the matter, the U.S. Securities and Exchange Commission has notified ETH exchange-traded fund issuers that their funds can begin trading on July 23, 2024. The SEC reportedly has no further comments on the recently filed S-1 form and has requested a final version by Wednesday, July 17. The market's reaction reflects growing optimism about the potential impact of these new financial products on the broader cryptocurrency ecosystem.
