Written by: Alex Xu
Introduction
Ethena is one of the few phenomenal DeFi projects in this cycle, with its token's circulating market cap once exceeding 2 billion USD (corresponding FDV exceeded 23 billion). However, since entering this April, its token price has rapidly declined, with Ethena's circulating market cap retreating more than 80% from its peak, and the token price has plummeted by as much as 87%.
Since September, Ethena has accelerated its cooperation with various projects, expanding the use cases for its stablecoin USDE, and the scale of the stablecoin has begun to bottom out and rebound, with its circulating market cap rebounding from a low of 400 million USD in September to about 1 billion USD currently.
In an article I published in early July (Altcoins are dropping, it's time to refocus on DeFi), I also mentioned Ethena, and my view at that time 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 3.6 billion USD at the time) relies on secondary market users being willing to buy its ENA tokens at a high price, providing high yield subsidies for USDE. This design, which is slightly Ponzi-like, can easily lead to a negative spiral of business and token prices when market sentiment is poor. The key point for Ethena's business transformation lies in whether USDE can one day truly become a stablecoin with a large number of ‘natural holders,’ at which point its business model will also complete the transition from a public arbitrage fund to a stablecoin operator.’
Afterward, ENA's price continued to drop by 60%, and even now, after rebounding nearly twice from the low point, it is still over 30% lower than the previous price.
At this time, I will reassess Ethena, focusing on the following three questions:
Current business level: Ethena's current core business indicators, including scale, revenue, overall costs, and actual profit levels.
Future business outlook: The exciting narrative and future development of Ethena.
Valuation level: Is the current price of ENA in an undervalued hitting zone?
This article represents my stage thoughts up until publication and may change in the future, and the views are highly subjective and may contain errors in facts, data, or 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 yields,’ meaning its track is the same as that of MakerDAO (now SKY), Frax, crvUSD (Curve's stablecoin), and GHO (Aave's stablecoin)—all stablecoins.
In my view, the business models of current stablecoin projects in the crypto space are basically similar:
Raise funds, issue debt (stablecoins), and expand the project's balance sheet.
Use the raised funds for financial operations and earn financial returns.
When the earnings obtained from the project's operating funds exceed the total costs incurred from fundraising and running the project, the project is profitable.
Taking the centralized stablecoin project—USDT's issuer—Tether as an example, Tether raises U.S. 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 USDT's broad usage, it holds a value in the users' minds equivalent to that of the U.S. dollar, yet can accomplish many things that traditional U.S. dollars cannot (such as instantaneous cross-border transfers), users are willing to provide Tether with U.S. dollars in exchange for USDT without compensation, and when you want to redeem USDT from Tether, you also have to pay a certain redemption fee.
As a latecomer in the stablecoin project space, Ethena is evidently at a disadvantage in terms of network effects and brand credibility compared to established projects like USDT and DAI, specifically reflected in its higher fundraising costs. Only when users have higher yield expectations are they willing to provide their assets to Ethena in exchange for USDE. Ethena's approach is to fundraise by offering users project tokens ENA as incentives and stablecoin (from the financial income of project operations) returns.
1.2 Ethena's core business data
1.2.1 USDE issuance scale and distribution.
Data source: https://app.ethena.fi/dashboards/solvency
After USDE's issuance scale reached a new high of 3.61 billion in early July 2024, its scale continued to decline to 2.41 billion in mid-October, but it is gradually recovering, with about 2.72 billion as of October 31.
Among the scale of over 2.72 billion, 64% of USDE is currently in a staked state, with the corresponding APY at 13% (official website data).
Data source: https://dune.com/queries/3456058/5807898
It can be seen that the primary purpose for most users holding USDE is to obtain wealth management income; 13% is the USDE-based ‘risk-free return’ and also Ethena's current financial cost for raising user funds.
At the same time, the yield of short-term U.S. Treasury bonds during the same period was 4.25% (data from October 24), while the deposit rates for USDT on the largest DeFi lending platform Aave were 3.9%, and for USDC it was 4.64%.
We can see that Ethena is still maintaining a relatively high fundraising cost in order to expand its fundraising scale.
USDE is issued not only on the Ethereum mainnet but also expanded across multiple L2 and L1 chains. Currently, the scale of USDE issued on other chains is 226 million, accounting for approximately 8.3% of the total.
Data source: https://dune.com/hashed_official/ethena
Additionally, Bybit, as an investor in Ethena and an important cooperation platform, not only supports USDE as collateral for derivative trading but also offers yields as high as 20% for USDE stored 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 USDE (over 400 million at peak).
Data source: https://dune.com/hashed_official/ethena
1.2.2 Protocol revenue and underlying asset distribution.
Ethena's current sources of protocol revenue are three:
Income from staked ETH in the underlying assets;
Income generated from funding rates and basis income from derivative hedging arbitrage;
Wealth management income: holding in stablecoin form, obtaining deposit interest or incentive subsidies, such as rewards from holding USDC on Coinbase through the loyalty program (Coinbase's cash subsidy for USDC, with annualized rates around 4.5%), as well as existing Spark's sUSDS (formerly sDAI), etc.
According to Token terminal's data approved by Ethena, Ethena's revenue has emerged from last month's low, with October's protocol revenue at 10.63 million USD, a month-on-month increase of 84.5%.
Data source: Tokenterminal, Ethena protocol income and the income allocated to USDE (cost of revenue).
In the current protocol income, a portion is allocated to USDE stakers, while another portion goes into the protocol's reserve fund, used to address expenditures when funding rates are negative and various risk events.
In the official documentation, it states that ‘the amount of protocol income allocated for the reserve fund must be decided through governance.’ However, I did not find any specific proposals regarding the reserve distribution ratio on the official forum, and changes in the specific ratios were only initially announced in its official blog. The actual situation is that the distribution ratio and logic of Ethena's protocol income have undergone multiple adjustments after going live, during which the official initially considered community opinions, but the specific distribution plan is ultimately determined by the official subjectively and has not gone through a formal governance process.
As can also be seen from the data from Token terminal, the distribution ratio between Ethena's income for USDE stakers (the red column in the chart, i.e., cost of revenue) and reserve funds is very volatile.
When the protocol income was high in the early days of the project, most of the protocol income was allocated to the reserve, with 86.7% of the protocol income allocated to the reserve account during the week of March 11. After entering April, as ENA's price began to plummet rapidly, the income from ENA tokens was insufficient to stimulate the demand for USDE. To stabilize the scale of USDE, the allocation of Ethena's protocol income began to lean towards USDE stakers, with most of the income allocated to USDE staked users. Only in the past two weeks has Ethena's weekly protocol income started to significantly exceed the expenditures allocated to USDE staked users (not considering the ENA token incentives).
The underlying asset situation of Ethena, data source: https://app.ethena.fi/dashboards/transparency
From the current perspective of Ethena's underlying assets, 52% are BTC arbitrage positions, 21% are ETH arbitrage positions, 11% are ETH staking asset arbitrage positions, and the remaining 16% are stablecoins. Thus, Ethena's primary source of income is BTC-dominated arbitrage positions, while the previously emphasized ETH staking income contributes only a small percentage due to its limited asset share.
Quarterly average yield of BTC and ETH perpetual contract arbitrage, data source: https://app.ethena.fi/dashboards/hedging
From the perspective of the average yield trend of BTC's perpetual contract arbitrage, the average yield for the fourth quarter has already moved out of the low range of the third quarter and returned to the level of the second quarter of this year, with an average annualized yield of over 8% so far this quarter; however, even in the poor market conditions of the third quarter, the overall average annualized yield for BTC arbitrage remained above 5%.
The annualized yield of ETH's perpetual contract arbitrage is generally similar to that of BTC, and has now returned to over 8%.
Let us look at the market contract scale of Sol, which is about to be included as an underlying asset for Ethena. Even with the rise in Sol's price this year, the contract holdings have significantly increased, currently reaching 3.4 billion USD, but still far from ETH's 14 billion USD and BTC's 43 billion USD (not including CME data).
Trends in SOL's contract holdings, data source: Coinglass
As for the funding cost of Sol, from the largest positions on Binance and Bybit, its recent annualized funding rate is similar to BTC and ETH, currently around 11%.
Current annualized funding rates of mainstream cryptocurrencies.
Data source: https://www.coinglass.com/zh/FundingRate
That is to say, even if Sol is subsequently included as an arbitrage target for Ethena, its scale and yield do not show a significant advantage compared to BTC and ETH, and it won't bring 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:
Financial expenditures, paid in USDE, with the payment recipients being USDE stakers. The source of income is Ethena's protocol revenue (derivative arbitrage and ETH staking, as well as stablecoin wealth management).
Marketing expenditures, paid in ENA tokens, with payment recipients being users participating in various growth activities (Campaigns) by Ethena. These users earn points by participating in activities (different phases of the Campaign have different point names, such as Shards for the earliest, later called Sats) and exchange points for corresponding ENA token rewards at the end of each quarterly activity.
Financial expenditures are relatively straightforward; for users staking USDE, they have clear income expectations, and the official website clearly indicates the current yield of USDE:
The current yield of staked USDE is 13%, source: https://ethena.fi/
The complexity arises from the continuous array of marketing campaigns initiated by Ethena since its project launch, which have different rules, combined with the specific behavior incentivization via points, and also introduced a weighting mechanism that involves comprehensive calculations across multiple cooperative platform activities.
Let us briefly review the series of growth activities undertaken by Ethena since its launch:
1. Ethena Shard Campaign: Epoch 1-2 (Season 1)
Time: 2024.2.19-4.1 (less than one and a half months)
Primary incentivizing behavior: Providing stablecoin liquidity for USDE on Curve.
Secondary incentivizing behavior: Minting USDE, holding sUSDE, depositing USDE and sUSDE in Pendle, holding USDE on various partnership L2s.
Scale growth: During this period, USDE's scale grew from less than 300 million to 1.3 billion.
Amount of ENA spent, i.e., the marketing expenditure for activities: a total of 750 million, accounting for 5%. Among them, the 2000 largest wallets can instantly receive 50%, and the remaining 50% will be linearly distributed over the remaining 6 months. According to Dune dashboard data created by @sankin, nearly 500 million ENA has been claimed between June, with the highest price of ENA before June being about $1.5 and the lowest around $0.67, averaging about $1; after early June, ENA began to rapidly decline from $1, dropping to around $0.2, with an average price of about $0.6, and the remaining 250 million ENA was mostly claimed during this period.
We can roughly estimate that the value corresponding to 750 million ENA = 5*1 + 2.5*0.6, approximately 650 million USD.
That is to say, the scale of USDE grew by about 1 billion USD in less than 2 months, with corresponding marketing expenditures reaching 650 million USD, not including the financial expenditures paid for USDE.
Of course, as the first airdrop of ENA, the large marketing expenditures at this stage are special.
2. Ethena Sats Campaign: Season 2
Time: 2024.4.2-9.2 (5 months)
Primary incentivizing behavior: Locking ENA, providing liquidity for USDE, using USDE as collateral for loans, depositing USDE in Pendle, depositing USDE in restaking protocols, and storing USDE on Bybit.
Secondary incentivizing behavior: Locking USDE on the official platform, holding and using USDE on cooperating L2s, using sUSDE as collateral for loans, etc.
Scale growth: During this period, USDE's scale grew from 1.3 billion to 2.8 billion.
The amount of ENA spent, i.e., the marketing expenditure for activities: like the first season, the second season's reward is also 5% of the total amount, which is 750 million ENA (with the 2000 wallets receiving the most airdrop also facing a 50% TGE and subsequent unlock for up to 6 months). Based on the current price of ENA at $0.35, the value corresponding to 750 million ENA is approximately 260 million USD.
3. Ethena Sats Campaign: Season 3
Time: From 2024.9.2 to 2025.3.23 (less than 7 months)
Primary incentivizing behavior: Locking ENA, holding USDE in officially designated cooperative protocols (mainly DEX and lending), depositing USDE in Pendle.
Scale growth: As of now, despite the plans for the third quarter, the growth of USDE's scale has encountered bottlenecks, and its scale is currently around 2.7 billion, still down from the 2.8 billion at the start of the third quarter.
Amount of ENA spent: Considering that the third quarter spans nearly 7 months, which is longer than the second quarter, and that ENA's reward incentives will likely continue to decrease, the total incentive amount for the third quarter is still likely to maintain the total of 5%, which means 750 million is highly likely.
Thus, we can roughly calculate the total protocol expenditures of Ethena since its launch this year up to now (October 31):
Financial expenditures (paid to USDE stakers in stablecoin form): 81.647 million USD.
Marketing expenditures (paid to participating users in ENA token form): 650+260=910 million USD (this does not yet account for potential expenditures after September).
Trends in Ethena's quarterly protocol revenue and financial expenditures, source: tokenterminal
Meanwhile, the total protocol income during the same period was 124 million USD.
That is to say, contrary to the impression that ‘Ethena is very profitable,’ Ethena's income, after deducting financial and marketing expenditures, has resulted in a net loss of 868 million USD as of October this year. Here, I have not considered the ENA token expenditures from September to October, so the actual loss amount may be higher than this value.
Net loss of 868 million, this is the price for the USDE market capitalization scale reaching 2.7 billion within a year.
In fact, like many DeFi projects in the previous cycle, Ethena has taken the route of raising core business indicators through token subsidies, increasing protocol revenue. However, Ethena has adopted a unique point system this round, delaying token issuance and incorporating more partners as participation channels, making it difficult for participating users to intuitively assess their final financial returns from engaging in Ethena activities, which in a sense enhances user stickiness.
2. Future business outlook: The exciting narrative and future development of Ethena.
In the past two months, ENA has achieved nearly 100% rebound from its low, even under the condition that ENA's Season 2 rewards were opened in early October. These two months have also been dense with Ethena news and positive developments, such as:
October 28: The on-chain options and perpetual contract project Derive (formerly Lyra) has included sUSDE as collateral.
October 25: USDE was included as collateral for OTC trading by Wintermute.
October 17: Ethena initiated a proposal to integrate Ethena's liquidity and hedging engine into Hyperliquid.
October 14: The Ethena community proposed to include SOL as an underlying asset of USDE.
September 30: The first project of the Ethena ecosystem debuted, the derivatives exchange Ethereal, promising a 15% token airdrop to ENA users. Subsequently, Ethena Network announced that it would release more information about product launch schedules and new ecosystem applications based on USDE in the coming weeks.
September 26: Plans to launch USTB—the so-called 'new stablecoin launched in partnership with BlackRock.' In reality, USTB is a stablecoin with BlackRock's on-chain national debt token BUILD as its underlying asset, with limited direct relation to BlackRock.
September 4: In collaboration with Etherfi and Eigenlayer, the first stablecoin AVS collateral asset—eUSD—was launched. It can be obtained by depositing USDE into etherfi, and eUSD went live on September 25.
It can be said that in these two months, the scenarios for USDE and sUSDE have indeed increased, although the demand stimulation for USDE may not be obvious, such as the stablecoin AVS collateral eUSD launched in collaboration with Etherfi and Eigenlayer, which currently only has a scale of a few million.
In fact, what truly propelled this round of ENA price surge was the well-known trader and crypto KOL Eugene @0xENAS's strong promotional article on Ethena published on October 12 (Ethena: The Trillion Dollar Crypto Opportunity).
This article, which has nearly 400 shares, over 1800 likes, and more than 700,000 views, led to ENA's price rising from $0.27 to $0.41 within four days, an increase of over 50%.
In the article, Eugene emphasized three reasons after reviewing some of Ethena's product features; however, in my view, apart from the first reason, the other two reasons are full of critiques.
1. The U.S. 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 new stablecoin USTB launched in partnership with BlackRock is an ‘absolute gamechanger,’ which will greatly enhance the adoption of USDE, as USDE can switch its underlying assets to USTB during periods when market perpetual arbitrage yields are negative, obtaining risk-free returns from national bonds.
Critique: USTB, as a stablecoin with BUILD as its underlying asset, does not equate to USTB being a stablecoin jointly launched by BlackRock and Ethena, just as Dai has a large amount of USDC as its underlying asset, but Dai is not a stablecoin jointly launched by Circle and MakerDAO. In reality, USDE can obtain treasury bond yields during periods of negative perpetual yields by directly closing positions and allocating to Build or sDAI, or by converting to USDC and storing it on Coinbase to earn a 4.5% annualized subsidy, without the need to issue another USTB for holding. USTB resembles more of a gimmicky product to ride on BlackRock's traffic, and calling such a mediocre product an ‘absolute gamechanger’ only raises doubts about the author's cognitive level or writing motives.
3. The future emission rate of ENA will decrease, rapidly reducing the selling pressure compared to before.
Critique: In reality, the total incentive amount for Season 2 still has 5% of the total ENA, meaning that 750 million tokens will enter circulation over the next 6 months, which is not significantly less than the total incentive amount of the previous season. Moreover, in March next year, ENA will face a massive unlock for the team and investors, and the inflation expectations for ENA over the next six months are not optimistic.
However, there are still exciting stories to look forward to for Ethena in the coming months to a year.
Firstly, with the rising expectations of Trump's presidency and the Republican victory (results can be seen in a few days), the warming of the crypto market is beneficial for the perpetual arbitrage yields and scale of BTC and ETH, increasing Ethena's protocol income.
Secondly, more projects may emerge in the Ethena ecosystem after Ethereal, increasing ENA's airdrop income.
Thirdly, the launch of Ethena's self-operated public chain can also bring attention and staking opportunities for ENA, although I expect this will only be launched after more projects accumulate in the second layer.
However, the most important aspect for Ethena is still whether USDE can be accepted as collateral and trading assets by more leading CEXs.
Among the leading exchanges, Bybit has already established deep cooperation with Ethena.
Coinbase has its own USDC to operate, and given the complexity of regulation as an American company, the likelihood of it supporting USDE as collateral and trading pairs is basically zero.
Among the two major CEXs, OKX has the possibility of including USDE in stablecoin trading pairs and contract collateral, as it has participated in two rounds of Ethena's financing, aligning financial interests to some extent. However, this possibility is not large, as this action would also bring operational and endorsement risks associated with Ethena to OKX. Compared to OKX, Binance, which only participated in one round of Ethena's investment, has an even lower likelihood of including USDE in stablecoin trading pairs and collateral, especially since Binance itself also has its own supported stablecoin project.
It is believed that USDE will become the collateral asset for contracts in major exchanges, which is also one of the reasons Eugene was optimistic about Ethena in a previous article, although I am not very optimistic about it.
3. Valuation level: Is the current price of ENA in an undervalued hitting zone?
We analyze ENA's current valuation from both qualitative analysis and quantitative comparison.
3.1 Qualitative analysis.
Potential events in the coming months that may favor ENA token prices and are likely to occur include:
The increase in arbitrage income brought about by the warming of the crypto market reflects the improvement in expected protocol income, resulting in an increase in ENA prices, thus promoting the growth of USDE scale.
Including SOL as an underlying asset can attract the attention of SOL ecosystem investors and projects.
More projects similar to Ethereal may emerge in the Ethena ecosystem in the coming months, bringing more airdrops for ENA.
Before the next wave of large ENA unlocks, the project team has an incentive to raise token prices, both to facilitate an upward spiral in business and token prices and to provide themselves with a higher selling price.
Furthermore, based on Ethena's performance over more than half a year since launch, the Ethena project team's business capabilities are exceptionally strong, arguably the best among many stablecoin projects in terms of external cooperation expansion, more aggressive and efficient than the leading stablecoin project MakerDAO.
Currently, factors that are unfavorable to the value of ENA tokens and suppress ENA prices include:
ENA lacks real cash yield distribution, primarily offering somewhat abstract staking scenarios (such as using it as collateral for AVS to ensure Ethena's multi-chain security) and self-mining.
The actual profitability of the Ethena project is poor, and the massive subsidies implemented to open the market have severely increased the project's net losses, which are essentially borne by ENA token holders.
ENA still faces significant inflation pressure in the next six months, stemming from both ENA token expenditures in marketing activities, and the massive unlock of the core team and investors in late March next year. According to tokenomist data, ENA tokens will face an inflation pressure of 85.4% from the current circulation.
Data source: https://tokenomist.ai/
3.2 Quantitative comparison.
Ethena's business model is essentially no different from other stablecoin projects; its innovation lies in the use of raised assets, specifically profiting through perpetual contract arbitrage.
Therefore, we will use MakerDAO (now SKY), the largest stablecoin project by current market cap, as a benchmark for valuation comparison.
It can be seen that compared to the established protocol MakerDAO, Ethena's token ENA currently does not offer cost-performance in terms of protocol income or profit.
Summary
Although many people refer to Ethena as a representative innovative project in this cycle, its core business model is no different from other stablecoin projects, all of which raise funds for financial operations and profit, and strive to promote the use scenarios and acceptance of their bonds (stablecoins) to minimize their fundraising costs.
At this stage, Ethena, which is still in the early stages of stablecoin promotion, remains in a substantial loss phase, contrary to what many KOLs have said about it being a ‘very profitable project.’ Its valuation is not underestimated compared to stablecoin representative projects like MakerDAO.
However, as a new player in this track, Ethena has demonstrated very strong business development capabilities, being more aggressive than other projects. Like many DeFi projects in the last cycle, rapid scale expansion and more project adoption will enhance investors' and researchers' optimistic expectations for the project, subsequently driving up token prices. The rising token prices will bring higher APY, further increasing USDE's scale, forming a self-reinforcing upward spiral.
However, 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 increases of the newly issued tokens seem to be supported only by optimistic sentiment, lacking any value linkage.
Thus, a fast-paced game has begun.
Ultimately, only a few projects can rise from such a downward spiral. The previous stablecoin star Luna (UST issuer) has already been buried, Frax's business has significantly shrunk, 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 require more time to validate the stability of their product architecture and their survival capabilities after subsidy reductions.
