Author: Jack Inabinet, Bankless; Translated by: Bai Shui, Golden Finance
Ethena dominated DeFi in 2024, and despite facing significant criticism and attention during the launch of its synthetic dollar, the team's efforts have become one of the most prominent success stories in DeFi this year as traders flocked to the protocol.
There are signals indicating that as other DeFi participants seek to capture Ethena's growth prospects, the game of tokenizing basis trading has only just begun.
In recent months, the market bubble has significantly increased Ethena's revenue, transforming ENA into the best-performing cryptocurrency company.
Today, we explore the success story of Ethena in 2024.
Explosive growth
Ethena accepted its first public fundraising on February 19, and within a month of launching on the mainnet, the circulating supply of USDe has surpassed all stablecoin competitors except five.
Due to its significant 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 stalled due to waning excitement over the ENA airdrop and a cooling cryptocurrency market.
Although Ethena subsequently decided on May 16 to reduce the insurance capital utilization rate, temporarily reviving USDe and leading to a 50% expansion in supply over a month, the ongoing compression of funding rates throughout the third quarter caused losses. By September, the increase in USDe supply had completely reversed, with ENA's price down 86% from its post-launch peak.
While the funding rate arbitrage strategy employed by Ethena has long been possible for any trader familiar with futures, the issue is that the funds collateralizing these trades must be locked on an exchange (whether in CeFi or DeFi), rendering them unable to be locked.
Through Ethena's approach, this basis trading position becomes 'tokenized' and expressed in USDe, allowing traders to earn additional yields in DeFi or lend against their held assets.
Although third-party applications were initially hesitant to quickly incorporate USDe collateral, Ethena's synthetic dollar now dominates the crypto credit market due to simple yield economics.
Yield providers that cannot compete with Ethena's market-leading returns may face the risk of reduced deposits or excessive lending demand. This dangerous dynamic could algorithmically set borrowing rates far above market value, forcing numerous DeFi lending markets to frantically purchase billions of dollars in USD derivative collateral when financing rates soar again in November.
In just a few weeks, the deposit cap for Aave sUSDe skyrocketed to $1 billion (at the beginning of November, Ethena collateral held in its lending market was only a mere $20 million). Meanwhile, other lenders on MakerDAO and Morpho are absorbing $1.2 billion in Pendle sUSDe primary token (PT) exposure with a very high maximum leverage ratio of 91.5%, in an environment of extremely low liquidity.
Unparalleled assets?
Ethena's assets are now intertwined with blue-chip DeFi, with ENA showing great interest, rebounding over 500% from a low in September, ultimately stabilizing not far from its post-launch peak.
Although the negative funding rate environment is a known risk that could lead to losses for USDe, many cryptocurrency observers are optimistic that Ethena's recently deployed U.S. Treasury product (USDtb) could serve as a suitable alternative for basis trading, establishing a yield floor for Ethena depositors.
That said, funding rates are inherently unstable, and there is significant uncertainty regarding how Ethena will appropriately respond to long-term negative funding rates. If losses must be realized to convert existing synthetic dollar exposure into Treasury collateral, USDe investors might start proactively selling tokens to avoid additional losses, leading to further redemptions that could force USDe to liquidate or trigger a crisis of confidence across the market. Liquidations occur in thin markets with high hedging demand (i.e., during market downturns).
At the core of Ethena is an unregulated tokenized hedge fund. Although its basis trading achieved great success in Q4 2024, investors should consider the various unknown factors associated with the protocol that could pose issues when financing rates change.
