Author: Jack Inabinet, Bankless; Translated by: Bai Shui, Jinse Finance
Ethena dominated DeFi in 2024, despite facing considerable criticism and scrutiny at the launch of its synthetic dollar; however, as traders flocked to the protocol, the team's efforts have become one of the most notable success stories in DeFi this year.
There are signals indicating that, as other DeFi participants seek to capture Ethena's growth prospects, the game of tokenizing basis trading is just beginning.
In recent months, the market bubble has significantly increased Ethena's revenue, transforming ENA into one of the best-performing cryptocurrency companies.
Today, we explore Ethena's success story in 2024.
Explosive growth
Ethena received its first public funding on February 19, and within a month of its mainnet launch, the circulating supply of USDe had surpassed all stablecoin competitors except for five.
Due to its substantial airdrop incentives and timely entry into the hottest financing rate environment of the year, the supply of USDe expanded unrestrictedly to $2.39 billion before mid-April, then stagnated due to waning excitement over the ENA airdrop and a cooling cryptocurrency market.
Although Ethena subsequently decided to reduce the insurance fund utilization on May 16, temporarily revitalizing USDe and leading to a 50% expansion in supply over the month, the continuous compression of funding rates throughout the third quarter resulted in losses. By September, the increase in USDe supply had completely reversed, with ENA's price dropping 86% from its post-launch peak.
While the funding rate arbitrage strategy adopted by Ethena has long been possible for any trader familiar with futures, the issue is that the collateral for these trades must be locked on the exchanges (whether in CeFi or DeFi), rendering them inaccessible.
Through Ethena's approach, this underlying trading position itself becomes 'tokenized' and expressed in USDe, allowing traders to earn additional returns in DeFi or lend against the assets they hold.
Although third-party applications were initially hesitant about the rapid incorporation of USDe collateral, due to simple yield economics, Ethena's synthetic dollar now dominates the crypto credit market.
Yield providers unable to compete with Ethena's market-leading returns may face the risk of reduced deposits or excessive borrowing demand. This dangerous dynamic may algorithmically set borrowing rates far above market value, and when funding rates surge again in November, it could force numerous DeFi lending markets to frantically purchase billions of dollars in dollar derivative collateral.
In just a few weeks, the deposit cap for Aave's sUSDe skyrocketed to $1 billion (at the beginning of November, its loan market held a mere $20 million in Ethena collateral). Meanwhile, other lenders on MakerDAO and Morpho are absorbing $1.2 billion in Pendle sUSDe primary token (PT) exposure at an extremely high maximum leverage rate of 91.5%, amidst very low liquidity.
Unparalleled assets?
Ethena's assets are now intertwined with blue-chip DeFi, which ENA is very interested in, rebounding more than 500% from the lows in September, impressively stabilizing not far from the post-launch peak.
Although the negative funding rate environment is a known risk that may lead to losses for USDe, many cryptocurrency observers are optimistic that Ethena's recently deployed U.S. Treasury product (USDtb) could become a suitable alternative for basis trading, establishing a yield floor for Ethena's depositors.
That said, funding rates are inherently unstable, and there is significant uncertainty regarding how Ethena will appropriately respond to prolonged negative funding rate scenarios. If losses must be realized to convert existing synthetic dollar exposure into treasury collateral, USDe investors may begin to preemptively sell tokens to avoid further losses, leading to additional redemptions that could force USDe to liquidate or trigger a trust crisis in the entire market. Liquidation occurs in thin markets where hedge demand is high (i.e., during market downturns).
At its core, Ethena is an unregulated tokenized hedge fund. Although its basis trading achieved great success in Q4 2024, investors should still consider the various unknowns of the protocol, which may pose problems when financing rates change.
