Author: xpara
Compiled by: TechFlow
Summary of key points
The SEC is expected to approve a spot Ethereum ETF, which could bring in $5 billion in inflows within six months.
The approval of an Ethereum ETF could boost the returns of Ethena’s synthetic dollar sUSDe, similar to what happened after the approval of a Bitcoin ETF.
Ethena’s products are subject to funding rate fluctuations, liquidity challenges, and potential risks in smart contracts and custody operations, but these issues have been transparently addressed.
Ethena plans to enhance the utility of its ENA Token and is preparing to launch the Ethena application chain.
2024 has been a unique year for the crypto industry. The approval of Bitcoin ETFs at the beginning of the year enabled traditional investors to gain exposure to Bitcoin price movements through regulated financial products, driving positive market sentiment and market capitalization growth.
In terms of the crypto industry, the current trend is to launch your own rollups and memecoins. Compared to the previous bull market cycle, this phase has not seen many new fundamental innovations. But in the field of DeFi applications, Ethena stands out. Ethena's synthetic dollar USDe became the fastest crypto dollar to reach $3 billion, surpassing the records of DAI and USDC. Its success is attributed to its unforkable architecture, unique business model, and sustainable yield opportunities.
Currently, the biggest focus of the market is the expected approval of the Ethereum ETF, which is expected to be announced in July this year. This could bring new liquidity to the Ethereum ecosystem, which in turn will bring other opportunities and new development opportunities for Ethena's products - USDe, sUSDe and ENA. This article will explore the current sentiment towards Ethereum ETFs and how this affects Ethena.
1. Current Status of Ethereum ETFs and Estimated Inflows
Prior to May 2024, the sentiment surrounding Ethereum ETFs was dominated by skepticism and uncertainty. This uncertainty stems from the U.S. SEC’s historical reluctance to approve cryptocurrency ETFs, especially those related to Altcoins like Ethereum. As of July 2024, the U.S. Securities and Exchange Commission (SEC) has taken steps to approve a spot Ethereum ETF. After approving a Bitcoin spot ETF at the beginning of the year, the SEC granted a rule change in May 2024 to allow exchanges to list spot Ethereum ETFs. Several asset managers, including BlackRock, Bitwise, and Fidelity, have already submitted applications for these products. As of July 16, the spot ETF could begin trading on July 23.
来源：Galaxy《Sizing the Market for the Ethereum ETF》
1.1 Estimated capital inflow after approval
来源：Galaxy Digital, CoinDesk, Crypto Adventure, CryptoSlate, CoinDesk, Cointelegraph, The Block, Investing.com
It is difficult to estimate Ethereum inflows as Ethereum ETF market dynamics are influenced by different factors than Bitcoin, such as the large amount of ETH locked in staking, bridges, and smart contracts, which may amplify ETH price sensitivity. As the asset becomes more accessible to retail investors, this demand is expected to drive early inflows, and institutional interest will increase as wealth management platforms increase accessibility. However, the lack of staking rewards may reduce some of the appeal.
Cryptocurrency exchange Gemini predicts that the spot Ethereum ETF could see up to $5 billion in net inflows within the first six months of trading. Analysts at JPMorgan, on the other hand, are more conservative, predicting net inflows of $3 billion in 2024. Many analysts use the performance of Bitcoin ETFs as a benchmark, with estimates ranging from 15% to 50% of Bitcoin ETF inflows. The Bitcoin ETF attracted $15.1 billion in net inflows in its first five months of trading.
There is still debate over whether Ethereum ETF approval would have a similar significant impact on ETH prices as a Bitcoin ETF would have on BTC. Some analysts believe the effect may be more modest due to current market conditions and investor saturation. Ilan Solot, co-head of digital assets at Marex Solutions, said, “General pessimism is a strong basis for outperformance. For sell-the-news strategies, many will try to replay what happened with the BTC ETF. However, I worry that many inflow forecasts may be over-benchmarked.” ation, comparing the numbers to the BTC ETF.”
2. sUSDe opportunities that may arise from Ethereum ETF approval
Approval of a spot Ethereum ETF could make sUSDe an attractive option for investors, similar to what happened after the approval of a Bitcoin ETF. Additionally, approval could also bring more institutional money to the Ethereum ecosystem, increasing demand for USD-denominated yield-generating assets like sUSDe. As a high-yield synthetic dollar, sUSDe could appeal to investors who want to maintain USD exposure while benefiting from Ethereum market growth.
As a complementary investment strategy to Ethereum ETF exposure, sUSDe is a good choice. Let's first review the situation when the Bitcoin ETF was approved and examine how sUSDe's returns work and its potential influencing factors.
2.1 Review of the situation when Bitcoin ETF was approved
The approval of a Bitcoin ETF has had a profound impact on the market, driving up prices and funding rates. Funding rates are periodic payments between long and short positions in the futures market, and these rates increase significantly as more traders take long positions in anticipation of rising prices. These rates are affected by the supply and demand dynamics of the underlying asset.
Prior to the ETF approval, funding rates were relatively stable, hovering around 10%. However, after approval, these rates rose dramatically, reaching an annualized rate of up to 50%. Similarly, the approval of the Ethereum ETF could drive up funding rates for ETH perpetual futures, benefiting sUSDe holders, as the token’s returns are partially derived from these funding rates.
Additionally, the price of Bitcoin has also increased since the approval. The chart shows the correlation between Bitcoin price and perpetual futures contract annualized funding returns between July 2023 and July 2024. Data shows that both Bitcoin prices and funding rates increased significantly after ETF approval. The U.S. SEC approved a Bitcoin ETF on January 10, 2024, causing the price of Bitcoin to surge from around $40,000 to nearly $80,000 within a few months.
Source: Ethena
USD-denominated assets, such as Ethena USDe, gained significant traction following the approval of a Bitcoin ETF. These assets offer stability and attractive yields, making them ideal collateral on DeFi platforms. For example, sUSDe's yield surged to over 30% following the ETF approval, underscoring its appeal among investors looking for stable and high-yielding assets. Let's take a look at how this benefit works and the potential factors that could affect this benefit.
Source: Ethena
2.2 Potential impact on sUSDe earnings
Ethena's USDe, a synthetic USD token, became a particularly attractive option after the Bitcoin ETF was approved. By taking advantage of increased market activity and rising funding rates, USDe was able to generate returns of over 30% after the ETF was approved. This impressive return was achieved through a variety of strategies, including delta hedging of staked Ethereum collateral and exploiting the spread between spot and futures markets through basis arbitrage. Let's take a look at how it works and why an Ethereum ETF would affect this return.
2.2.1 sUSDe income generation mechanism
Source: Yield Explanation | Ethena Labs
In the Ethena protocol, the yield mechanism for sUSDe (staked USDe) operates through a reward-bearing "Token Vault" system similar to other staking tokens (such as Rocketpool's rETH). When users stake their USDe, they receive sUSDe tokens, which represent a partial stake in the total USDe held in the staking contract.
The protocol generates yield from two main sources: staking rewards for holding assets like stETH as collateral, and funding and basis yield earned through Delta hedging derivatives positions. These returns are distributed to sUSDe holders in a way that the value of sUSDe relative to USDe increases over time. Importantly, the protocol ensures that the value of sUSDe can only increase or remain stable, and any potential losses are covered by Ethena's insurance fund. (However, coverage of the insurance fund is currently only about 1%.) Users do not need to take any additional action to earn returns; just hold sUSDe to benefit from the returns generated by the protocol. To learn more about how it works, read the article "Ethena: Growing the Synthetic Dollar to Billions" by Steve from Four Pillars.
2.2.2 Ethereum ETF and sUSDe Profits
One of the key factors driving higher yields on sUSDe is the continued existence of basis and funding rates in the perpetual futures market. With the approval of the Ethereum ETF, demand for perpetual contracts is expected to improve as institutional investors may seek Ethereum exposure through various financial instruments. This increase in demand could lead to a sustained positive funding rate environment, benefiting sUSDe holders who can earn additional yield from these funding payments.
Source: Ethena
As more spot volumes move to regulated ETFs, spot demand on offshore exchanges lags, potentially creating arbitrage opportunities. This could lead to a persistent basis between spot and futures prices, which traders could exploit, resulting in higher yields for sUSDe holders. Additionally, positive sentiment following ETF approval could push up funding rates, further enhancing sUSDe’s earnings potential. Historical data shows that funding rates tend to increase during periods of positive sentiment.
However, market dynamics are complex and difficult to predict, and actual results may vary depending on a number of factors.
来源：Ethereum: Funding Rates - All Exchanges | CryptoQuant
3. Risks of USDe and sUSDE
Ethena has grown rapidly in a short period of time, becoming the fastest crypto-dollar to reach $3 billion. This raises the question, is this growth sustainable? What are the risks? In this section, we explore some of the risks.
3.1 Funding interest rate and liquidity risk
Source: App | Ethena
Ethena faces risks related to funding rates and liquidity. If short positions outnumber long positions, the funding rate could turn negative, causing the protocol to lose money. If the funding rate turns negative, the protocol will need to pay large amounts to long positions, which could deplete the reserve fund (insurance fund). According to Ethena's research, the combined returns of stETH and short ETH funds are positive on 89% of days, but negative on 11% of days.
As USDe's market capitalization grows, management difficulty increases, and it becomes difficult to maintain its Delta neutral position and utilize the reserve fund. In addition, liquidity risk will arise if the underlying derivatives market is illiquid. This may affect the stability of USDe and the overall returns distributed to stakers. For example, if the liquidity of centralized exchanges decreases during a market downturn, Ethena may have difficulty rebalancing its positions.
3.2 Risks of Custody and Smart Contracts
Source: Solution: The Internet Bond | Ethena Labs
Ethena is also exposed to custody and smart contract risks. The protocol relies on external platforms such as centralized exchanges and offline settlement (OES) providers, which introduces potential operational or security vulnerability risks. If these platforms face bankruptcy or operational issues, it may affect Ethena's ability to execute trades and maintain its Delta neutral position. However, if a centralized exchange goes bankrupt, Ethena's perpetual position will be closed, but the collateral assets themselves should be safe because they never enter the exchange.
Additionally, vulnerabilities or bugs in smart contracts could lead to unintended consequences or be exploited. While Ethena has taken steps to mitigate these risks, such as using multiple providers and proactive monitoring, they remain a significant concern.
3.3 Risks of Ethena
As Ethena’s head of research Conor Ryder said, Ethena has potential risks, but it is one of the few projects that publicly researches and builds a real-time dashboard to disclose the status of Ethena.
These dashboards, accessible on the Ethena website and platforms like Dune Analytics and DefiLlama, provide real-time information on custodial wallet holdings, exchange subaccount positions, on-chain wallet assets, USDe supply, and key USDe and sUSDe metrics. The position dashboard displays details on collateral assets, derivative positions for delta hedging, and USDe in circulation. (Some information is not accessible on other platforms.)
Conor Ryder, head of research at Ethena, also said: “To be clear, USDe is not safer or better than other projects - we just provide a risk profile that is not correlated with other DeFi projects. There is no connection to the traditional banking system. Real returns do not come out of thin air. Bring CeFi cash flow into DeFi.”
4. The situation behind $ENA and USDe
Ethena launched its governance token ENA on April 2, 2024, marking an important step towards decentralization and community governance. As part of the launch, Ethena distributed 750 million ENA tokens, 5% of the total supply, to early ecosystem contributors and participants in its "Shard Campaign".
In order to incentivize more people to participate in the Ethena ecosystem, Ethena previously launched the Season 1 "Shards" Campaign in early April 2024. The Season 2 "Sats" Campaign is currently underway and will end on September 2, 2024. The campaign incentivizes participants to earn Sats through Pendle and Morpho's strategies, and the total token distribution is committed to 15-20% of all point activities.
ENA's token economics structure is designed to balance incentivizing contributors and maintaining an active ecosystem. Core contributors hold 30% of tokens, investors hold 25%, the Ethena Foundation holds 15%, and the remaining 30% is used for ecosystem development, including airdrops and funding new projects.
Source: ENA Token Launch — Ethena Labs
Like many application tokens, $ENA serves as the governance token of the Ethena protocol, allowing holders to make decisions on a variety of matters, including determining USDe’s collateral assets (modification or addition), selecting a custodial entity (OES provider), cross-chain implementations, grants, which exchanges to use, and choosing a risk management framework.
However, the ENA token currently has limited utility. Although Ethena's TVL is growing rapidly and is one of the top projects generating a lot of revenue, these revenues are not currently shared with token holders.
This will change in the future development of Ethena. Ethena will not be just another DeFi project. It has a roadmap that will make $ENA more opportunistic, two of which are potential revenue sharing and Ethena Appchain.
4.1 Potential Revenue Sharing
Source: Token Terminal [Date: Monday, May 27, 2024]
Ethena has experienced significant revenue growth, with its synthetic U.S. dollar USDe becoming the fourth-largest stablecoin by market capitalization. Here are some key points for Ethena’s revenue growth:
Revenue Leaders: In the last week of May, Ethena’s USDe generated $7 million in revenue, surpassing Solana’s $6.3 million. Only Tron and Ethereum’s DApp revenues exceeded it.
Market Cap: USDe’s market cap has surpassed $3 billion, making it the fastest growing crypto-USD asset in crypto history.
Revenue Forecast: Ethena is expected to generate $222.5 million in revenue over the next 12 months, according to Token Terminal.
As the governance token of the Ethena protocol, ENA token holders may have the opportunity to vote on proposals including revenue distribution mechanisms. This may allow ENA holders to influence the distribution decisions of protocol revenue, which may include returning a portion of the income generated by USDe staking or other protocol activities to token holders.
4.2 ENA Appchain and re-staking
Recently, Ethena updated the roadmap of ENA Token and introduced new token economics initiatives. Ethena launched ENA's staking function to provide security for cross-chain transfers and integrated ENA into its financial infrastructure, including the upcoming Ethena Appchain. In addition, users are required to lock at least 50% of the available tokens to incentivize long-term holding of ENA holders. This move is part of a strategy to ensure the stability and growth of the ecosystem.
Source: Update to $ENA Tokenomics — Ethena Labs
The protocol introduces universal restaking of ENA, with potential rewards for ENA restaking pools within Symbiotic. These pools will provide economic security for cross-chain transfers of USDe, leveraging the LayerZero DVN messaging system. This initiative is part of the Ethena Appchain development, which aims to build financial applications and infrastructure using USDe as the primary asset. ENA staked in these pools will receive a variety of rewards, including high multipliers, Symbiotic points, and potential future allocations from LayerZero.
Going forward, the utility of ENA will expand significantly. The Ethena roadmap plans to integrate ENA into a variety of financial applications and infrastructure solutions on the Ethena Appchain, including spot DEXs, perpetual decentralized exchanges, yield trading platforms, money markets, and uncollateralized lending protocols. Additionally, ENA can be used for on-chain prime brokerage services, options and structured products. These broad applications will not only enhance ENA’s utility but also drive demand for it as the ecosystem grows.
5. Looking to the future
Source: X (@leptokurtic_)
The approval of the Ethereum ETF marks a critical moment in the cryptocurrency market, similar to the impact of the Bitcoin ETF at the beginning of the year. This development is expected to bring a lot of liquidity and institutional interest to Ethereum, which may affect prices and markets. Ethena, with its synthetic USDe and yield token sUSDe, is in a good position to benefit from these changes. Increased demand for ETH-related financial instruments may drive positive funding rates and create arbitrage opportunities, resulting in higher returns for sUSDe holders. This situation also occurred after the approval of the Bitcoin ETF.
However, it is important to recognize the inherent risks that come with this rapid growth and market changes. Ethena must address challenges related to funding rate volatility, liquidity management, and custody and smart contract vulnerabilities. Despite these risks, the platform's transparent approach to risk management and proactive measures, such as real-time dashboards and the use of a diverse set of providers, increase confidence in it.
Since its inception, USDe has achieved exponential growth, making it the fastest crypto dollar to reach a $3 billion market cap. With the approval of an Ethereum ETF, Ethena is expected to grow further. Additionally, expanding ENA's utility through initiatives such as revenue sharing and the Ethena Appchain may provide additional value and stability. Therefore, it is important to keep an eye on this opportunity.
Appendix A: Key Timelines for Ethereum ETF
A.1 January 2024: Paving the way for Bitcoin ETF
The approval of a spot Bitcoin ETF in January 2024 marked a major milestone and paved the way for altcoin ETFs, with Ethereum becoming the next likely candidate. The success of Bitcoin ETFs has led to unprecedented net inflows, solidifying BTC’s position as a legitimate investment asset. The launch of these Bitcoin tracking funds became one of the largest debuts in ETF history. According to Morningstar Direct, this translated into $8 billion in net inflows. As of the end of June, the nine newly launched products had accumulated $38 billion in assets, demonstrating the strong demand among investors to gain exposure to cryptocurrencies through traditional financial instruments.
Source: Bitcoin ETF Flow – Farside Investors
A.2 May 2024: Ethereum ETF gains momentum
In May 2024, the U.S. Securities and Exchange Commission (SEC) made an important rule change by approving applications from major exchanges to list spot Ethereum ETFs. This decision allowed eight Ethereum ETFs to be listed on Nasdaq, the New York Stock Exchange, and the Cboe exchange. The SEC's approval came after the applicants amended their filings to comply with regulatory preferences, specifically removing Ethereum staking from the ETF fund operations, which was seen as a potential obstacle to approval.
The rule change requires ETF issuers to update their Form 19b-4, which is used to propose new rules or change existing rules for self-regulatory organizations such as stock exchanges. While the SEC approved the forms for the eight spot Ethereum ETFs, including those from Bitwise, BlackRock and VanEck, the issuers still need to get their separate S-1 registration statements approved before they can officially begin trading.
A.3 June 2024: Expectations and delays
Expectations for the approval of an Ethereum ETF continued to grow in June 2024. SEC Chairman Gary Gensler said the approval process was progressing smoothly, with some analysts predicting a launch as early as July 4. However, the SEC delayed the launch of the spot Ethereum ETF, pushing the timeline to mid-July or later.
A.4 July 2024: Delays and uncertainties
Delays in Ethereum ETF approval until July 2024 have led to investor uncertainty. Although some analysts predict a launch within the next two weeks, the market remains cautious. Bitwise filed a revised S-1 form indicating the products were almost ready to launch, but the SEC’s comments pushed the timeline back even further. Market sentiment is mixed, with some analysts predicting that the price of ETH could fall if the ETF fails to generate significant inflows.
A.5 Mid-July 2024: Confirmation is coming
There are reports that spot Ethereum ETFs could begin trading as early as next week. According to sources familiar with the matter, the U.S. SEC has notified Ethereum exchange-traded fund issuers that their funds can begin trading on July 23, 2024. The SEC reportedly had no further comments on the recently filed S-1 form and requested a final version by Wednesday, July 17. The market reaction reflects optimism about the potential impact of these new financial products on the broader cryptocurrency ecosystem.
