Original author: Ray, ArkStream Capital
Prologue to a New Era of Strategic Investment: Ethena
On November 5, 2024, Trump successfully won the U.S. election, marking the beginning of an economic transformation in the U.S. led by traditional industries and decentralized finance. The core of Trump's policy is to break the dollar hegemony's constraints on the U.S. domestic economy, revive the industrial economy, and weaken the excessive control of the Democratic Party and its financial capital over the U.S. economy. In early November, ArkStream Capital keenly recognized the vital role of Ethena (ENA) at this historical moment and strategically invested $5 million in Ethena. As one of ArkStream's heavily invested projects, Ethena's performance has met our expectations and is providing us with excellent financial returns.
Ethena, as an innovator in the DeFi field, is committed to providing various stable and scalable crypto-native currency solutions. Its first stablecoin is the crypto-native synthetic dollar USDe, with the core innovation being the use of Delta hedging strategies to hold various mainstream crypto assets' spot and corresponding short positions to maintain an intrinsically stable value. This design does not rely on traditional dollar bank reserves, allowing it to bypass the traditional financial system dominated by the Democratic Party and become a brand-new dollar alternative tool.
The second stablecoin USDtb is jointly developed with Securitize, a well-known institution in the RWA field, relying on BlackRock BUIDL, connecting traditional financial products such as dollars, short-term U.S. Treasury bonds, and repurchase agreements, creating a digital dollar supported by stable returns from real-world assets, efficiently channeling funds into the U.S. industrial and real economy, assisting Trump in revitalizing industry and creating jobs.
It is worth mentioning that World Liberty Financial, led by the Trump family, despite not adopting a DAO model, showcases its grand vision in pushing DeFi into the mainstream financial market in the U.S. Among numerous segmented markets and infrastructure projects in the DeFi field, those capable of generating continuous income are of particular interest, such as the lending platform AAVE, the oracle network LINK, ONDO supported by RWA, and the ENA promoting crypto-native stablecoin solutions. It is reported that WLFI has cumulatively invested $750,000 in Ethena tokens through on-chain transactions, while also announcing a collaboration to use the yield-generating token sUSDe from Ethena as collateral asset for the WLFI lending platform.
Source: https://x.com/ethena_labs/status/1869413546225983536
Investment Perspective on RWA's Stablecoins
RWA (Real World Assets), payments, and stablecoins constitute three interwoven core elements in the financial field, which can be considered as a whole in specific financial scenarios or viewed as specialized tracks with independent meanings. Among these three, the concept of payment is relatively clear, with its application scenarios resembling those in the traditional financial world. The other two, RWA, refer to assets that have been digitized through Web3 technology and transformed on the blockchain into transparent and easily tradable assets. This process covers a diverse range of asset classes, including stablecoins, private credit, U.S. Treasury bonds, commodities, and stocks. Given that stablecoins occupy a unique and significant proportion of this, they can also be considered as an independent track. This chapter will explore the growth rate and market space of RWA and stablecoins from an investment perspective, and will focus on analyzing the evolution of the stablecoin market structure and the development trajectory and challenges faced by crypto-native stablecoins.
Excellent Growth Rate and Broad Prospects
By combining the total asset value trend chart of RWA and stablecoins, we can intuitively grasp their market scale and growth dynamics. Currently, the total asset value of the RWA market is approximately $218.3 billion, of which the stablecoin market scale reaches $203.4 billion, accounting for as much as 93.2%. The stablecoin market has grown from $30 million at the beginning of 2018 to now $203.4 billion. Such a huge growth not only reflects the strong development momentum of stablecoins but also highlights their enormous market potential. In the non-stablecoin RWA field, the total asset value has increased from $10 million in 2018 to $200 million in 2021, and then surged to the current $14.9 billion, with an impressive compound annual growth rate corresponding to this growth trend. In this growth process, private credit and U.S. Treasury bonds have played a key role.
Total Market Value of RWA (including stablecoins)
Source: https://app.rwa.xyz/
Stablecoin Market Capitalization
Source: https://app.rwa.xyz/stablecoins
Total Market Value of RWA (excluding stablecoins)
Source: https://app.rwa.xyz/
Stablecoins, as a unique and critical asset class in the RWA field, deserve special attention and analysis. Before exploring further, let's first briefly understand the dollar and its related assets. The dollar, with its outstanding international status, has become a key currency for cross-border transactions, financial settlements, and global investments worldwide. The dollar and its related assets, such as U.S. Treasury bonds, play a central role in financial markets, further solidifying the dollar's status as the global reserve currency and making it a symbol of hard currency globally.
In the cryptocurrency market, stablecoins pegged to the dollar have played a key role since 2018. They are not only the benchmark currency units for trading but also serve as shadow dollar assets, active in various scenarios such as transfer payments. Taking the daily average transfer volume on-chain as an example, the current daily transfer volume stabilizes at a high range of $25 billion to $30 billion, and even in market downturns, this figure has not dropped below $10 billion. In terms of trading volume, according to a report by CCData, in November 2024, the monthly trading volume of stablecoins on centralized exchanges reached $18 trillion, exceeding half of the total market capitalization of the cryptocurrency industry. Combining data from CoinMarketCap, we can estimate that the average daily trading volume in November was $200 billion, leading to a monthly trading volume of $600 billion, indicating that stablecoins account for 30% of the industry trading volume in centralized exchanges. This proportion does not yet include on-chain stablecoin trading volumes, meaning its actual share may be even higher. In addition to these two core indicators of trading volume and transfer volume, stablecoins also offer stable and sustainable returns by introducing assets like U.S. Treasury bonds as underlying assets, bringing positive externalities to the industry and further promoting the connection and integration of Web3 with reality.
Daily Trading Volume of Stablecoins
Source: https://studio.glassnode.com/charts/usd-transfer-volume
Stablecoin Market Capitalization and Trading Volume
Source: https://coinmarketcap.com/charts/
Tether's Profits in the First Three Quarters of 2024
Source: https://tether.io/news/tether-hits-7-7-billion-2024-nine-month-profits-102-5-billion-in-u-s-treasury-holdings-almost-120-billion-usd₮-circulation-and-an-over-6-billion-reserve-buffer-in-q3-2024-attestation/
With the approval of Bitcoin and Ethereum spot ETFs in 2024, capital inflows are driving the total market value of the cryptocurrency industry to new highs. We expect that with the growth of industry market value and the continuous expansion of the user base, stablecoins are also likely to break historical records in several key data indicators such as market value scale, transfer volume, and trading volume.
Evolution of the Stablecoin Market Structure
The birth of stablecoins stems from the strong demand for price-stable tools in the cryptocurrency industry. In the early stages, mainstream cryptocurrencies like Bitcoin and Ethereum had significant price volatility, making it difficult to serve as stable units of account. Stablecoins, by pegging to fiat currencies like the dollar, provide a relatively stable value store and medium of exchange. This allows users to hold a digital asset that can withstand market fluctuations and facilitate quick capital transfers. With the increasing market demand for stablecoins, various types of stablecoins have gradually emerged, including fiat-backed stablecoins, decentralized collateralized stablecoins, and algorithmic stablecoins. These stablecoins provide users with diverse choices to meet different market demands and risk preferences.
When exploring the stablecoin market, we will focus on analyzing several representative stablecoins. These include USDT issued by Tether, USDC issued by Circle, DAI/USDS issued by the MakerDAO protocol, and the algorithmic stablecoin UST issued by Terra. Through basic analysis of these stablecoins, we can understand the characteristics of various stablecoins and their market performance.
As an early entrant in the cryptocurrency market, USDT has gained widespread market support and recognition since 2018. It is not only accepted by numerous exchanges but has also further penetrated both primary and secondary markets, DeFi protocols, many public chains, and Layer 2 after 2020. Therefore, USDT's market share has remained in a leading position. Currently, the underlying assets of USDT mainly include U.S. Treasury bonds and overnight reverse repos. Due to the fact that the transparency of these assets is not updated in real time, USDT has historically encountered several depegging events, with the maximum deviation approaching 10%. Nevertheless, with its first-mover advantage and global applicability, USDT still dominates spot and derivatives trading volume on mainstream exchanges. Mainstream exchanges generally use USDT as the core pricing currency pair, even though they also support other stablecoins like USDC or FDUSD; USDT's trading volume and market depth still far exceed other stablecoins.
Tether's 2024 Q3 Reserves Report
Source: https://tether.to/en/transparency/?tab=reports
Tether's Past Transparency Reports
Source: https://tether.to/en/transparency/?tab=reports
USDC, issued by Circle, which has strong regulatory resources and multiple asset management licenses. Since its launch in October 2018, USDC has become the second-largest stablecoin in the cryptocurrency market, with a market share of about 20.9%. Based on its excellent compliance and transparency, the underlying assets of USDC mainly consist of cash, short-term Treasury bonds, and overnight reverse repurchase agreements. Most USDC reserves are held in the Circle Reserve Fund, registered as a 2a- government money market fund with the SEC, which provides daily investment portfolio reports through BlackRock to ensure transparency. At one point, the issuance volume of USDC approached 77.6% of USDT, but during the bankruptcy event of Silicon Valley Bank (SVB) in March 2023, about $3.3 billion of Circle's USDC reserves were held at SVB, a small part of its total reserves of $40 billion. This news caused market panic, leading to a sharp drop in USDC's price and a depegging phenomenon, even triggering a bank run. However, with the joint rescue plan of the Federal Reserve and the Treasury, Circle announced that 100% of SVB's deposits were safe, gradually calming market panic, and the price of USDC also returned to near normal levels. After this incident, USDC's vulnerability in the face of risks in the traditional banking system was fully exposed, and its issuance volume showed a downward trend. To enhance the stability and transparency of USDC, Circle implemented a series of measures. Although the market share has not restored to previous highs, USDC's natural compliance still keeps its on-chain trading volume and other key data indicators competitive with USDT.
Circle Reserve Fund
Source: https://www.blackrock.com/cash/en-us/products/329365/
DAI/USDS is a decentralized stablecoin issued and managed by MakerDAO, designed to maintain a fixed exchange rate of 1:1 with the dollar. Initially, DAI was generated through an over-collateralization mechanism where users could lock crypto assets (such as Ethereum) in Maker protocol's smart contracts to generate DAI. This mechanism requires the value of collateral to be greater than the amount of DAI generated to ensure the stability of DAI's value. However, in times of severe price volatility, DAI may lead to cascading liquidations, and the transparency of on-chain transactions makes the liquidation threshold of minters easily targetable, resulting in liquidation failures and bad debts. To mitigate these risks, MakerDAO introduced more collateral options such as USDC and wBTC, and established a dedicated risk management team. DAI's decentralized characteristics provide unique advantages in certain application scenarios, especially playing a core role in the DeFi field, not only as a medium of exchange but also widely used in lending, payments, and staking activities. Although compared to centralized stablecoins like USDT and USDC, DAI's market share is relatively small, its market value still holds a place in the global stablecoin market.
Collateral List for DAI / USDS
Source: https://makerburn.com/#/rundown
UST, as a decentralized algorithmic stablecoin in the Terra ecosystem, aims to maintain a fixed exchange rate of 1:1 with the dollar. It relies on the smart contracts of the Terra blockchain, using Luna tokens as value support. Users destroy an equivalent amount of Luna when minting UST and exchange an equivalent amount of Luna when redeeming UST, maintaining price stability through the actions of market arbitrageurs. During periods of Luna price increases, the mechanism of UST can promote positive cycles, known as a 'positive spiral' ascent. However, when the price of Luna declines, the market value of Luna may struggle to support the market value of UST, leading UST into a 'death spiral', where a price drop causes UST to depeg. UST once offered high yields through the Anchor Protocol, attracting user deposits, thus expanding its scale and becoming one of the main stablecoins in the market. Unfortunately, during the collapse of the Terra ecosystem in May 2022, UST's price stabilization mechanism faced severe challenges, ultimately leading to its decoupling from the dollar and the price dropping to zero. This event highlighted the risks and challenges of purely algorithmic stablecoins in market confidence and algorithmic design, especially under extreme market conditions, where these challenges become particularly evident.
It can be seen that fiat-currency-backed stablecoins already occupy a large part of the stablecoin market, and the market scale continues to grow. However, due to the constantly emerging trading demands in the market, decentralized issued stablecoins have been exploring new paths. Among them, Ethena has stood out as a leader, with USDe, a synthetic dollar issued by Ethena, occupying a place in the DeFi field with its innovative financial solutions. The characteristic of USDe lies in its adoption of advanced Delta hedging strategies to maintain its peg to the dollar, which makes it stand out among traditional stablecoins. In addition, USD 0 issued by Usual is also worth attention, as this stablecoin integrates the robustness of traditional financial instruments with the transparency, efficiency, and composability of DeFi by introducing RWA as underlying support. USD 0, with its permissionless and compliant framework, directly returns real returns from RWA to community users, demonstrating the competitiveness of new stablecoins in the market. The emergence of these emerging stablecoins not only enriches the market diversity but also provides users with more choices and investment opportunities.
Core Indicators of Crypto-native Stablecoins
We define stablecoins such as USDe and USD 0 that do not rely on fiat currency support as 'crypto-native stablecoins'. This type of stablecoin includes those backed by mainstream cryptocurrencies like Bitcoin and Ethereum, stablecoins pegged algorithmically, and stablecoins that use neutral strategies to anchor value.
In assessing these crypto-native stablecoins, we consider multiple dimensions, with the most important being the stability of the stablecoin, its market capitalization, and application scenarios (including integration with DeFi and support from centralized exchanges).
Stability is the key indicator for measuring the value of stablecoins. The core value of stablecoins lies in their value stability, which is the ability to maintain a stable exchange rate with the pegged asset. If a stablecoin cannot maintain this anchoring relationship, its 'stability' will be called into question, thus losing its fundamental function as a stablecoin.
Under the premise of ensuring that the stablecoin price is anchored stably, the stablecoin must reach a certain market scale to become a mainstream currency and occupy a place in the financial ecosystem. If a stablecoin cannot achieve scale expansion, its influence and practicality will be limited, making it difficult to have a significant impact in a fiercely competitive market.
The market scale of stablecoins relies on the breadth of their application scenarios. Stablecoins lacking practical application scenarios, regardless of their market value, find it difficult to solidify their market position, akin to a tree without roots. Therefore, stablecoins must exhaust all means to gain a broader user base and diversified application scenarios to ensure the stability of their value and enhance liquidity.
Why We Invest in Ethena
Ethena's vision is to reshape the cryptocurrency system, building bridges between DeFi, CeFi, and TradFi to promote the prosperity of next-generation internet finance. Its first stablecoin USDe has achieved deep integration in several key areas of DeFi, including money markets, leveraged collateral in derivatives markets, infrastructure for stablecoins, interest rate swap protocols, and spot AMM DEX. In the exchange sector, Ethena's liquidity pools not only support existing centralized and decentralized trading platforms but also help emerging exchanges solve liquidity challenges during their initial stages, becoming market-leading providers of depth and over-the-counter liquidity. For TradFi, Ethena's USDe is favored for its unique yield, combining two local actual yields from billion-dollar scale cryptocurrencies, with its returns showing a weak negative correlation with traditional financial interest rates, and the underlying assets are held by custodians recognized by TradFi. USDe provides large investors with a convenient way to achieve excess returns in the cryptocurrency market through a single asset. With the decline in real interest rates, the growing speculative behavior and leverage demand for cryptocurrencies are expected to further boost Ethena's USDe yields, making it an important driver for attracting TradFi entities with trillion-dollar scale investments into the Ethena ecosystem.
Delta Neutral Synthetic Dollar USDe
The USDe stablecoin launched by Ethena, as a crypto-native asset, differs from dollar stablecoins that rely on traditional assets like U.S. Treasury bonds as underlying support. Its issuance mechanism involves holding mainstream cryptocurrencies in spot and establishing short positions on exchanges. This innovative model of stablecoin plays an important role in the market, not only locking in the value of mainstream crypto assets but also injecting liquidity into the derivatives market. Especially during bull markets, as mainstream asset prices rise and the scale of derivatives contracts expands, the scale of USDe also grows. Additionally, the short funding rate of USDe provides holders with a more attractive yield compared to traditional stablecoins like USDT. This advantage attracts more users to choose USDe, further promoting the expansion of USDe's scale.
Minting, Redemption, and Staking
The minting process of USDe allows users to exchange USDe by sending underlying assets to the protocol, while redemption involves users destroying USDe to exchange back the original supporting assets. Staking USDe allows users to lock USDe in smart contracts to earn returns. When users stake USDe, they will receive sUSDe, whose value increases as the protocol accumulates earnings. Users can unstake sUSDe anytime to obtain USDe after value accumulation.
Delta Neutral Anchoring Mechanism
The anchoring mechanism of USDe mainly achieves stability relative to its underlying supporting assets by executing automated and programmatic Delta-neutral hedging strategies. This strategy establishes short positions equivalent to the spot assets in the derivatives market to offset the risks of price fluctuations in the spot assets, thus maintaining the synthetic dollar value of USDe relatively stable under most market conditions. Additionally, the sources of income for the Ethena protocol, including spot staking returns and short position funding rate income, further enhance the stability of USDe. Through this series of mechanisms, USDe can serve as a reliable medium of exchange and value storage tool in the crypto market, maintaining a stable peg to the dollar.
Hedging Strategies and Risk Control
Ethena's hedging mechanism is a system composed of off-chain application services that interact with on-chain smart contracts and the Ethereum blockchain, responsible for acquiring market data, verifying data integrity, calculating risk exposures, coordinating internal system information, publishing minting and redemption prices for USDe, determining order routing and execution locations, real-time verification of information and operational integrity, monitoring the availability of dependencies, coordinating collateral flows, and publishing real-time developments. The system is centered on protecting the protocol's collateral to ensure the stability of USDe and the real-time integrity of the system. In addition, Ethena has a deep understanding of various potential risks, including smart contract risks, external platform risks, liquidity risks, custodial operational risks, exchange counterparty risks, and market risks. To address these challenges, Ethena actively takes measures to mitigate and diversify these risks to enhance the robustness and reliability of the entire system.
Transparency and fund security
The core value of stablecoins lies in their anchoring ability, which is to maintain the stability of the value of the fiat currency they are pegged to. Historically, some stablecoins, such as USDT and USDC, have experienced depegging phenomena due to insufficient transparency and imperfect risk control mechanisms. To address this, Ethena ensures the stability and transparency of its asset management through multi-signature and asset custody mechanisms, as well as deep collaborations with exchanges. Moreover, in response to rate fluctuations in extreme market conditions, Ethena has established sufficient reserve funds. This series of strategies not only enhances the credibility of USDe but also provides solid safety guarantees for the returns of USDe, ensuring the interests of holders and the stability of the market.
TradFi-Friendly Digital Dollar USDtb
USDtb is an institution-grade stablecoin, backed by BlackRock's BUIDL, the world's largest asset management company, with backing assets including high-quality short-term Treasury bonds, ensuring its outstanding security and trust. In the DeFi field, USDtb is not only fully accessible and easy to integrate but can also be used as collateral in centralized exchanges and major brokers, providing traditional financial institutions with direct access to DeFi. Additionally, USDtb features a unique on-chain direct minting and redemption mechanism, achieving all-weather service and further enhancing its competitiveness and convenience in the digital asset market.
As a product independent of USDe, USDtb provides users with a new choice with distinctly different risk characteristics. Its existence allows USDe to respond more effectively to market challenges, especially during negative interest rate periods, where Ethena can close USDe's hedged positions and reallocate assets to USDtb, thus mitigating related risks and enhancing the overall system's stability and risk resistance.
ENA Token Design
The ENA token plays a key role in the Ethena ecosystem, serving both as a governance token, granting holders the right to participate in key decisions, such as electing members of the risk committee and shaping policy directions, and providing opportunities for staking to become sENA to earn additional returns. As ENA will be used as a voting tool for the Ethereal derivatives exchange in the future, its importance in Ethena's development blueprint becomes increasingly prominent. These functions not only solidify ENA's position as the core of the Ethena protocol but are also crucial for maintaining the protocol's decentralized governance and incentivizing user participation.
In terms of liquidity, ENA performs excellently on mainstream exchanges, with trading volumes consistently ranking among the top, which not only proves the market activity of the Ethena protocol but also indicates its broad recognition and acceptance in the market.
Operational Resources
Ethena has implemented a series of hedging strategies to respond to sudden situations in the derivatives market, ensuring the stability and security of USDe through deep cooperation with major exchanges. Additionally, the use of USDe as a trading pricing currency pair is gradually being implemented, thanks to Ethena's efforts to increase liquidity to mitigate risks. In terms of resources, Ethena collaborates with several top global market makers, who provide liquidity and market depth, further enhancing the market adaptability and resilience of USDe.
Source: https://ethena.fi/ecosystem
The Future Prospects of Ethena
In the stablecoin field, the competitive landscape is far from settled. While USDT and USDC occupy leading positions, emerging competitors are fully capable of challenging their market positions. The key lies in selecting stablecoin protocols that have unique mechanisms, can stabilize value anchoring, increase market capitalization, and expand application scenarios. Just as DEX has already occupied 10% of CEX trading volumes, decentralized financial products are rapidly seizing market resources due to their verifiability and convenience. We anticipate that by 2025, decentralized stablecoins like Ethena will continue to grow in market scale, reaching a market share of 10%, or $20 billion.
At the same time, we believe Ethena will become one of the important financial tools for implementing Trump's policies. The implementation of Trump's policies will also promote Ethena's strategic position in the revival of the U.S. economy and the reshaping of global finance, making it a crucial support for the domestic and global digital financial ecosystem. ArkStream Capital, as an industry pioneer, will witness this great transformation in the era of decentralized finance together with Ethena.
