Ethena is one of the few phenomenal DeFi projects in this round, with its token's circulating market cap exceeding 2 billion USD after its launch (corresponding FDV exceeds 23 billion). However, since entering April this year, its token price has fallen rapidly, with Ethena's circulating market cap retracting over 80% from its peak, and the token price dropping as much as 87%.
Since the beginning of September, Ethena has accelerated its pace of cooperation with various projects, expanding the usage scenarios of its stablecoin USDE. The scale of the stablecoin also began to rebound from its bottom, with its circulating market cap rebounding from a low of 400 million USD in September to around 1 billion USD currently.
In the article I published in early July (Altcoins are Falling, or the Best Time to Lay Out DeFi), I also mentioned Ethena, and my view at that time was:
‘…… The business model of Ethena (a public fund focused on perpetual contract arbitrage) still has a clear ceiling. Behind the large-scale expansion of its stablecoin (which reached 3.6 billion USD at that time) is the willingness of secondary market users to buy its ENA tokens at high prices, providing high returns for USDE. This somewhat Ponzi-like design can easily lead to negative spirals in business and token prices when market sentiment is poor. The key point for Ethena's business turnaround lies in whether USDE can one day truly become a stablecoin with a large number of 'natural holders', thus completing the transition of its business model from a public arbitrage fund to a stablecoin operator.’
Since then, the price of ENA has continued to fall by 60%. Even though the price has rebounded nearly twice from the low point, there is still a gap of over 30% from the price at that time.
At this moment, the author reassesses Ethena, focusing on the following three questions:
1. Current business level: Ethena's current core business indicators, including scale, income, overall costs, and actual profit levels.
2. Future business prospects: The narrative and future development of Ethena are worth looking forward to.
3. Valuation level: Is ENA's price currently in the undervalued hitting zone?
This article reflects the author's stage thoughts as of publication, which may change in the future, and the views are highly subjective, possibly containing 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: The current core business situation of Ethena
1.1 Ethena's business model
Ethena positions itself as a synthetic dollar project with 'native income', which means its track is in the same lane as MakerDAO (now SKY), Frax, crvUSD (Curve's stablecoin), and GHO (Aave's stablecoin)—stablecoins.
In the author's view, the business models of stablecoin projects in the crypto space 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.
When the income generated from the project's operational funds exceeds the comprehensive costs paid for raising funds and running the project, the project is profitable.
Taking the issuer of the centralized stablecoin project USDT, Tether, as an example, Tether raises USD from users, issues debt (USDT) certificates to users, and then invests the raised funds in government bonds, commercial papers, and other interest-bearing assets to obtain financial returns. Given the wide usage of USDT, its perceived value to users is equivalent to that of the US dollar, yet it can do many things that traditional dollars cannot (such as instant cross-border transfers), so users are willing to provide Tether with USD for free in exchange for USDT. Moreover, when you want to redeem USDT from Tether, you also need to pay a certain redemption fee.
As a latecomer in the stablecoin project, Ethena is clearly at a disadvantage in network effects and brand credibility compared to older projects like USDT and DAI. This is specifically reflected in its higher fundraising costs, as users are only willing to provide their assets to Ethena in exchange for USDE when there are relatively high yield expectations. Ethena's approach is to incentivize users with project tokens ENA and provide stablecoin yields (from the project's operational funds) for fundraising.
1.2 Core business data of Ethena
1.2.1 USDE issuance scale and distribution
Data source: https://app.ethena.fi/dashboards/solvency
After the issuance scale of USDE hit a new high of 3.61 billion in early July 2024, its scale continued to decline to 2.41 billion in mid-October and is currently gradually recovering, around 2.72 billion as of October 31.
Among the scale of over 2.72 billion, 64% of USDE is in a staked state, currently corresponding to an APY of 13% (data from the official website).
Data source: https://dune.com/queries/3456058/5807898
It can be seen that most users hold USDE mainly to obtain financial income, with 13% being the 'risk-free return' based on USDE, which is also Ethena's current financial cost to raise user funds.
Meanwhile, the yield on short-term US Treasury bonds during the same period was 4.25% (data from October 24), while the deposit rate for USDT on the largest DeFi lending platform Aave was 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 not only issued on the Ethereum mainnet but is also expanding on multiple L2 and L1s, with the scale of USDE issued on other chains currently being 226 million, accounting for about 8.3% of the total.
Data source: https://dune.com/hashed_official/ethena
Moreover, Bybit, as an investor in Ethena and an important cooperative platform, not only supports USDE as collateral for derivative trading but also offers yield rates as high as 20% for USDE stored on Bybit (which was reduced to a maximum of 10% in September). Thus, 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 income and distribution of underlying assets
Ethena's current protocol income sources include three:
1. Income from staked ETH among the underlying assets;
2. Income from funding rates and basis income generated from derivative hedging arbitrage;
3. Financial returns: Holding in stablecoin form to earn deposit interest or incentive subsidies, such as receiving rewards from the loyalty program (Coinbase's cash subsidy for USDC, with an annualized rate of about 4.5%) by placing USDC on Coinbase; and holding sUSDS (formerly sDAI) that exists in Spark, etc.
According to the data approved by Ethena's official Token terminal, Ethena's income over the past month has emerged from last month's trough, with October's protocol income at 10.63 million USD, a month-on-month increase of 84.5%.
Data source: Tokenterminal, Ethena protocol income and income distributed to USDE (cost of revenue)
Currently, part of the protocol income is allocated to USDE stakers, while part will enter the protocol's reserve funds (Reserve Fund) to cope with negative funding rates and various risk events.
In the official documentation, it states, 'The amount of protocol income for the reserve fund needs to be decided through governance.' However, the author did not find any specific proposals regarding the distribution ratio of reserves in the official forum, and changes in specific ratios were only announced in the official blog at the beginning. The actual situation is that the distribution ratio and logic of Ethena's protocol income have undergone multiple adjustments after launch. During the adjustment process, the officials initially listened to community opinions, but the specific distribution plan is still subjectively decided by the officials and has not gone through a formal governance process.
From the data of Token terminal shown in the above image, it can also be seen that the revenue of Ethena has a very sharp fluctuation in the proportion between the income of USDE stakers (the red bars in the above image, i.e., cost of revenue) and the reserves.
In the early stages of the project when protocol income was high, most of the protocol income was allocated to reserves, with 86.7% of the protocol income in the week of March 11 allocated to the reserve account. However, after entering April, as the price of ENA began to fall rapidly, the earnings on the ENA token side were insufficient to stimulate the demand for USDE. To stabilize the scale of USDE, the distribution of Ethena's protocol income began to tilt towards USDE stakers, with most of the income distributed to USDE stakers. It wasn't until the last two weeks that Ethena's weekly protocol income started to significantly exceed the expenditures allocated to USDE stakers (excluding ENA token incentives).
The underlying asset situation of Ethena, data source: https://app.ethena.fi/dashboards/transparency
From the current underlying assets of Ethena, 52% are BTC arbitrage positions, 21% are ETH arbitrage positions, 11% are ETH staking asset arbitrage positions, and the remaining 16% are 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 returns from BTC and ETH perpetual contract arbitrage, data source: https://app.ethena.fi/dashboards/hedging
From the trend of average returns from BTC perpetual contract arbitrage, the average return up to the fourth quarter has already escaped the low range of the third quarter, returning to the position of the second quarter of this year, with the current average annualized return exceeding 8%. However, even during the weak market conditions of the third quarter, the overall average annualized return from BTC arbitrage was still above 5%.
The annualized return from ETH perpetual contract arbitrage is also similar to BTC, currently back at the 8%+ level.
Let's take a look at the market contract scale of SOL, which is about to be included as part of Ethena's underlying assets. Even though the price of SOL has risen this year, drastically increasing the contract holdings to about 3.4 billion USD, there is still a significant gap compared to ETH's 14 billion USD and BTC's 43 billion USD (both not including CME data).
SOL's contract holding trend, data source: Coinglass
The funding costs for SOL, from the largest positions on Binance and Bybit, have shown that its recent annualized funding rate is similar to BTC and ETH, currently around 11%.
Current annualized funding rates for mainstream coins, data source: https://www.coinglass.com/zh/FundingRate
In other words, even if SOL is later included as an arbitrage target for Ethena, its scale and yield compared to BTC and ETH do not have obvious advantages, and it cannot 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:
1. Financial expenditures, paid in USDE, targeting USDE stakers, with income sourced from Ethena's protocol income (derivative arbitrage, ETH staking, and stablecoin financial management).
2. Marketing expenditure, paid in ENA tokens, targeting users participating in various growth activities (Campaigns) of Ethena. These users earn points by participating in activities (different stages of the Campaign have different point names, such as the earliest 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 marked the current yield rate for USDE.
The current yield for USDE staking is 13% source: https://ethena.fi/
Complicated is the continuous variety of marketing campaigns that Ethena started after the project went live, which have different rules, plus specific behaviors incentivized by points, and introduced a weighting mechanism, involving comprehensive calculations of multiple cooperative platform activities.
Let us briefly review a series of growth activities that have taken place since Ethena's launch:
1. Ethena Shard Campaign: Epoch 1-2 (Season 1)
Time: 2024.2.19-4.1 (less than a month and a half)
Primary incentive behavior: Providing stablecoin liquidity for USDE on Curve.
Secondary incentive behaviors: 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.
Amount of ENA spent, that is, the marketing expenditures of the activities: a total of 750 million, accounting for 5%. Among them, the ENA of the top 2000 wallets can redeem 50% immediately, and the remaining 50% will be distributed linearly over the remaining 6 months. Other smaller wallets have no unlocking restrictions. According to the Dune dashboard data created by @sankin, nearly 500 million ENA has been redeemed by June, while the highest price of ENA before June was around $1.5, and the lowest was about $0.67, with the average price considered to be around $1; after the beginning of June, ENA began to fall rapidly from $1, reaching a low of about $0.2, with an average price around $0.6, and the remaining 250 million ENA was basically redeemed during this period.
We can roughly estimate that the value corresponding to 750 million ENA is approximately 6.5 billion USD.
In other words, the scale of USDE has grown by about 1 billion USD in less than two months, with corresponding marketing expenditures reaching 650 million USD, and this does not include the financial expenditures paid for USDE.
Of course, as the first airdrop of ENA, the massive marketing expenditures during this stage have uniqueness.
2. Ethena Sats Campaign: Season 2
Time: 2024.4.2-9.2 (5 months)
Primary incentive behaviors: Locking ENA, providing liquidity for USDE, using USDE as collateral for lending, depositing USDE into Pendle, depositing USDE into Restaking protocols, depositing USDE into Bybit.
Secondary incentive behaviors: Locking USDE on official platforms, holding and using USDE on cooperative L2s, using sUSDE as collateral for lending, etc.
Scale growth: During this period, the scale of USDE grew from 1.3 billion to 2.8 billion.
The amount of ENA spent, that is, the marketing expenditures of the activities: similar to the first season, the total rewards for the second season are also 5% of the total, which is 750 million ENA (where the top 2000 wallets receiving the most airdrops also face 50% TGE and subsequent unlocks lasting up to 6 months). Based on ENA's current price of $0.35, the value corresponding to 750 million ENA is approximately 260 million USD.
3. Ethena Sats Campaign: Season 3
Time: 2024.9.2 to 2025.3.23 (less than 7 months)
Primary incentive behaviors: Locking ENA, holding USDE in officially designated cooperative protocols (mainly DEX and lending), depositing USDE into Pendle.
Scale growth: As of now, despite having plans for the third quarter, the scale growth of USDE has hit a bottleneck, currently around 2.7 billion, which is a slight decline from the 2.8 billion at the start of the third quarter.
Amount of ENA spent: However, considering that the third quarter lasts nearly 7 months, a bit longer than the second quarter, and the ENA reward incentives will most likely continue to trend downwards, so the total incentive amount for ENA in the third quarter is still likely to remain at 5% of the total, which is 750 million.
Thus, we can roughly calculate the total expenditures of the Ethena protocol from its launch until now (as of October 31):
Financial expenditures (paid to USDE stakers in stablecoins): 81.647 million USD
Marketing expenditures (paid to participating users in ENA tokens): 6.5+2.6=9.1 billion USD (this has not yet calculated potential expenditures after September)
Trends of Ethena's quarterly protocol income and financial expenditures, source: tokenterminal
Meanwhile, the total protocol income during the same period was: 124 million USD.
In other words, contrary to the impression that 'Ethena is very profitable', in fact, Ethena's income, after deducting financial and marketing expenditures, has shown a net loss of as high as 868 million USD by the end of October this year. The author has not yet considered the ENA token expenditures from September to October, so the actual loss amount may be higher than this figure.
868 million USD in net losses, this is the price of achieving a market cap scale of 2.7 billion USD for USDE within a year.
In fact, like many DeFi projects in the previous cycle, Ethena's approach is to raise core business indicators and increase protocol income through token subsidies. However, Ethena has adopted a unique point system in this round, delaying the issuance of tokens and including more partners as participation channels, 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 prospects: The narrative and future development of Ethena are worth looking forward to.
In the past two months, ENA has achieved nearly 100% rebound from the low point, and this occurred while ENA opened the rewards for Season 2 in early October. These two months have also been a period of intense news and positive developments for Ethena, such as:
October 28: On-chain options and perpetual contract project Derive (formerly Lyra) will include sUSDE as collateral.
October 25: USDE was included as collateral for OTC trading by Wintermute.
October 17: Ethena initiated a proposal to 'integrate Ethena liquidity and hedging engine into Hyperliquid'
October 14: The Ethena community initiated a proposal to include SOL as part of USDE's underlying assets.
September 30: The first project of the Ethena ecosystem network 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 launches and new ecosystem applications based on USDE in the coming weeks.
September 26: Plans to launch USTB— the so-called 'new stablecoin launched in collaboration with BlackRock', in fact, USTB is a stablecoin based on the on-chain government bond token BUILD issued by BlackRock, with limited direct relationship to BlackRock.
September 4: In collaboration with Etherfi and Eigenlayer, the first stablecoin AVS collateral asset—eUSD was launched, which can be obtained by depositing USDE into etherfi, and eUSD was launched on September 25.
It can be said that over these two months, the scenarios for USDE and sUSDE have indeed increased a lot, although the demand stimulation for USDE may not be obvious, such as the stablecoin AVS collateral asset eUSD launched in collaboration with Etherfi and Eigenlayer, which currently has a scale of only a few million.
In fact, what really drove this round of ENA price surge was a strong shout-out article about Ethena by renowned trader and crypto KOL Eugene @0x ENAS published on October 12: (Ethena: The Trillion Dollar Crypto Opportunity).
This repost has nearly 400 shares, over 1800 likes, and more than 700,000 views, which caused ENA's price to rise from $0.27 to $0.41 within 4 days, an increase of over 50%.
In addition to reviewing some of Ethena's product characteristics, Eugene emphasized three reasons in his article. However, in the author's view, apart from the first reason, the remaining two reasons are filled with criticisms:
1. The US interest rate cut has led to a decline in global risk-free rates, making USDE's APY more attractive, attracting more capital inflows.
2. The newly launched USTB stablecoin in collaboration with BlackRock is an 'absolute gamechanger' that will significantly enhance the adoption of USDE because when the market's perpetual arbitrage yield is negative, it can switch the underlying assets to USTB to obtain risk-free returns from government bonds.
Criticism: Just because USTB is based on BUILD as the underlying asset does not mean USTB is 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 fact, to obtain government bond yields during periods of negative perpetual yields, USDE can directly close the position and allocate to Build or sDAI or switch to USDC on Coinbase to earn a 4.5% annualized subsidy, completely unnecessary to issue another USTB to hold. USTB is more like a gimmick product to ride on BlackRock's popularity, and calling such a mediocre product an 'absolute gamechanger' can only raise doubts about the author's level of understanding or writing motives.
3. In the future, the emission speed of ENA will decrease, reducing the selling pressure compared to before.
Criticism: The actual rewards for Season 2 still account for 5% of the total ENA supply, meaning that 750 million tokens will enter circulation in the next 6 months, which is not significantly less than the total rewards 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 worth looking forward to stories for Ethena in the coming months to a year.
Firstly, with the rising expectations of Trump's ascension and the victory of the Republican Party (the results could be seen in a few days), the bullish crypto market benefits the perpetual arbitrage yield and scale of BTC and ETH, increasing Ethena's protocol income.
Secondly, more projects may emerge within 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 nominal scenarios such as staking for ENA, but the author expects this to be launched only after more projects accumulate on the second line.
However, what is most important for Ethena is that USDE can be accepted as collateral and trading assets by more leading centralized exchanges (CEX).
Among the leading exchanges, Bybit has already established deep cooperation with Ethena.
Coinbase has its own USDC to operate, and coupled with its status as a domestic US company, considering the complexity of regulation, the possibility of supporting USDE as collateral and stablecoin trading pairs is basically 0.
Among the two major CEXs, there is a possibility for OKX to include USDE as part of stablecoin trading pairs and collateral, as it participated in Ethena's two rounds of financing and has a certain consistency in financial interests. However, this possibility is not large as this move may also bring operational and endorsement risks related to Ethena for OKX; 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, and Binance itself also has its own supported stablecoin project.
It is believed that USDE will become the collateral margin asset for major exchanges, which is also one of the reasons Eugene is optimistic about Ethena in previous articles, though the author is not very optimistic about this.
3. Valuation level: Is ENA's price currently in the undervalued hitting zone?
We analyze the current valuation situation of ENA from both qualitative and quantitative comparison dimensions.
3.1 Qualitative analysis
Favorable events for the price of ENA tokens in the coming months, which are more likely to occur include:
· The rise in arbitrage income brought by the recovery of the crypto market reflects an improvement in protocol income expectations, causing ENA's price to rise and promoting the growth in the scale of USDE.
· Including SOL as part of the underlying assets can attract the attention of SOL ecosystem investors and project parties.
· More similar projects to Ethereal may emerge in the Ethena ecosystem in the coming months, bringing more airdrops for ENA.
· Before the next wave of ENA unlockings, the project party has an incentive to pump up the token price, firstly to promote a positive spiral in business and token price, and secondly to provide themselves with a higher selling price.
In addition, based on the performance of Ethena since its launch for more than half a year, the Ethena project team's business capabilities are very strong, and it can be said to be the best among many stablecoin projects in terms of external cooperation and expansion, being even more aggressive and efficient than the leading stablecoin project MakerDAO.
Currently, factors that are unfavorable for the value of ENA tokens and suppress the price of ENA include:
· ENA lacks real monetary profit distribution, more so as a relatively detached staking scenario (for example, serving as AVS assets to secure Ethena's multi-chain safety) and self-mining.
· The actual profitability of the Ethena project is poor, and the massive subsidies implemented to open the market have resulted in serious net losses for the project, which are essentially borne by ENA token holders.
· ENA still faces significant inflation pressure in the next six months, partly due to the expenditures of ENA tokens in marketing activities, and additionally in late March next year, it will face massive unlockings for core teams and investors after a year, according to tokenomist data, ENA tokens will face an inflation pressure of 85.4% on the current circulating amount in the next six months.
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 to profit through perpetual contract arbitrage.
Therefore, we will use MakerDAO (now SKY), the largest circulating market cap stablecoin project, as a comparative benchmark for valuation.
It can be seen that compared to the established protocol MakerDAO, Ethena's token ENA currently does not have cost-effectiveness in terms of protocol income or profit.
Conclusion
Although many people call Ethena a representative innovative project of this round, its core business model is no different from other stablecoin projects, which all raise funds for financial operations to profit and strive to promote the usage scenarios and acceptance of their bonds (stablecoins) to minimize their fundraising costs.
From the current stage, Ethena, which is in the early stage of stablecoin promotion, is still in a phase of huge losses, not as many KOLs claim to be a 'very profitable project'. Its valuation is not undervalued compared to the representative stablecoin project MakerDAO.
However, as a new player in this space, Ethena has demonstrated very strong business development capabilities, being more proactive than other projects. Like many DeFi projects from the previous cycle, rapid scale expansion and more project adoption will enhance the optimistic expectations of investors and researchers towards the project, thereby boosting the token price, and the rising token price will bring higher APY, further increasing the scale of USDE, forming a self-reinforcing upward spiral.
Eventually, such projects will face a critical point where people begin to realize that the growth of the project is driven by token subsidies, and the rise in the price of newly issued tokens seems to be supported only by optimistic sentiments, lacking a value link.
Thus, a fast-paced game has begun.
Ultimately, only a few projects can be reborn from such a downward spiral. The previous round's stablecoin star Luna (UST issuer) has already fallen, 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 verify the stability of their product architecture and survival capability after subsidy declines.
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 post: https://x.com/0x ENAS/status/1844756962854212024
