Ethena: Bridging Crypto and Stability #ENA
Introduction
ENA is a synthetic dollar protocol built on the $ETH blockchain. It aims to provide a crypto-native solution for a stable currency that isn’t reliant on traditional banking systems. In addition to its core functionality, ENA introduces a globally accessible dollar-denominated savings instrument called the “Internet Bond.”
How ENA Works
1. USDe: The Synthetic Dollar
- Ethena’s native token is called USDe, which is designed to mimic an algorithmic stablecoin.
- USDe tokens have a target peg of $1, and they are minted as users deposit ether (ETH) to the platform.
- The stability of USDe is maintained through a combination of mechanisms.
2. Generating Yield
- ENA offers an impressive 27% annualized yield to holders of its USDe tokens.
- This yield is calculated on a rolling seven-day basis and is subject to change.
- Users can deposit stablecoins (such as tether, frax, dai, Curve USD, and mkUSD) to receive USDe.
- Once acquired, USDe can be staked, allowing users to earn additional yield.
3. Two Sources of Yield Generation
- Staking Ether: ENA validators stake users’ deposited ether and earn 5% on the capital.
- Shorting Ether Futures: Ethena captures the funding rate by shorting ether futures. The estimated funding rate is currently above 20% based on historical modeling.
- The futures mechanism employed by ENA is akin to a “cash and carry” trade, where traders simultaneously take a long position in an asset and sell the underlying derivative. This strategy aims to profit from funding payouts rather than relying on asset price movements.
Community Reception and Criticism
- ENA has attracted massive inflows since going live, with more than $287 million of USDe minted.
- Some members of the crypto community have expressed concerns, citing previous projects that attempted similar models and ultimately failed due to yield inversions.
- Yield inversion occurs when the yield structure becomes unfavorable, leading to losses. The larger the stablecoin, the greater the risk.
