Original author: Ray, ArkStream Capital
The new era of strategic investment preface: Ethena
On November 5, 2024, Trump successfully won the U.S. election, marking the beginning of an economic transformation led by traditional industry and decentralized finance in the United States. The core of Trump's policies is to break the dollar hegemony that constrains the U.S. economy, revitalize the industrial economy, and weaken the excessive control of the Democratic Party and its financial capital over the U.S. economy. In early November, ArkStream Capital keenly perceived the crucial role Ethena (ENA) plays at this historical moment and strategically invested $5 million in Ethena. As one of ArkStream's heavily invested projects, Ethena's performance has met our expectations, bringing us outstanding financial returns.
Ethena, as an innovator in the DeFi field, is committed to providing various stable and scalable crypto-native currency solutions. Its first stablecoin is the crypto-native synthetic dollar USDe, with the core innovation being to maintain its intrinsic stable value by holding a variety of mainstream crypto assets in spot and corresponding short positions through Delta hedging strategies. This design does not rely on traditional dollar bank reserves and can bypass the traditionally Democrat-led financial system, becoming a brand new dollar alternative tool.
The second stablecoin, USDtb, was jointly developed with the well-known institution in the RWA field, Securitize, relying on BlackRock BUIDL, connecting traditional financial products such as U.S. dollars, short-term U.S. Treasury bonds, and repurchase agreements, creating a digital dollar supported by stable income from real-world assets, efficiently directing funds to the U.S. industrial and real economy, thus assisting Trump's core goal of revitalizing industry and creating jobs.
It is worth mentioning that World Liberty Financial, led by the Trump family, although WLFI does not adopt the DAO model, demonstrates its grand vision in pushing DeFi into the mainstream financial market in the U.S. Among the numerous sub-markets and infrastructure projects in the DeFi field, those capable of generating sustainable income, such as the lending platform AAVE, the oracle network LINK, the RWA-backed ONDO, and the ENA that promotes crypto-native stablecoin programs, are especially focused. It is reported that WLFI has cumulatively invested $750,000 in Ethena tokens through on-chain transactions and announced cooperation, planning to use Ethena's yield-bearing token sUSDe as collateral for its lending platform.
Source: https://x.com/ethena_labs/status/1869413546225983536
Investment perspective of RWA stablecoins
RWA (real-world assets), payments, and stablecoins constitute three interwoven core elements in the financial field. They can be considered as a whole in specific financial scenarios or viewed as specialized tracks with independent meanings. Among these three elements, the concept of payments is relatively clear, and its application scenarios are similar to those in the traditional financial world. The other two elements, RWA, refer to assets that have been digitized through Web3 technology and transformed into transparent and easily tradable assets on the blockchain. This process covers a diverse range of asset classes, including stablecoins, private credit, U.S. Treasury bonds, commodities, and stocks. Given that stablecoins occupy a unique and significant proportion within this context, they can also be considered as an independent track. This chapter will explore the growth rate and market space of RWA and stablecoins from an investment perspective, focusing on analyzing the evolution of the stablecoin market landscape and the development trajectory and challenges faced by crypto-native stablecoins.
Outstanding growth and vast prospects
By combining the total asset value trend chart of RWA and stablecoins, we can visually grasp their market scale and growth dynamics. Currently, the total asset value of the RWA market is about $218.3 billion, among which the stablecoin market scale reaches $203.4 billion, accounting for as much as 93.2%. The stablecoin market has grown from $30 million in early 2018 to the current $203.4 billion. Such huge growth not only reflects the strong development momentum of stablecoins but also highlights its enormous market potential. In the non-stablecoin RWA field, the total asset value has grown from $10 million in 2018 to $200 million in 2021, and then soared to the current $14.9 billion. This growth trend corresponds to a remarkable compound annual growth rate. In this growth process, private credit and U.S. Treasury bonds have played a key role.
RWA total market value (including stablecoins)
Source: https://app.rwa.xyz/
Stablecoin market value
Source: https://app.rwa.xyz/stablecoins
RWA total market value (excluding stablecoins)
Source: https://app.rwa.xyz/
Stablecoins, as a unique and critical asset class in the RWA field, deserve special attention and analysis. Before exploring, let's briefly understand the U.S. dollar and its related assets. The U.S. dollar, with its excellent international status, has become the key currency for cross-border transactions, financial settlements, and global investments worldwide. The U.S. dollar and its related assets, such as U.S. Treasury bonds, play a core role in the financial market, further consolidating the status of the dollar as a global reserve currency and making it a symbol of global hard currency.
In the cryptocurrency market, stablecoins pegged to the U.S. dollar have played a critical role since 2018. They serve not only as benchmark currency units for trading but also act as shadow dollar assets, active in various scenarios such as transfer payments. For example, the current daily transfer volume stabilizes in a high range of $25 billion to $30 billion, even during market downturns, this figure has not fallen below $10 billion. In terms of transaction volume, according to CCData's report, in November 2024, the monthly trading volume of stablecoins on centralized exchanges reached $1.8 trillion, exceeding half of the total market value of the cryptocurrency industry. Combining industry data from CoinMarketCap, we estimate the average daily trading volume for November to be $200 billion, meaning the monthly trading volume reached $6 trillion, indicating that stablecoins account for 30% of industry trading volume in centralized exchanges. This ratio does not yet include on-chain stablecoin trading volume, so its actual proportion may be even higher. In addition to trading volume and transfer volume as two core indicators, stablecoins also provide stable and sustainable returns by introducing stable income assets like U.S. Treasury bonds as underlying assets, bringing positive externalities to the industry and further promoting the connection and integration of Web3 with reality.
Daily trading volume of stablecoins
Source: https://studio.glassnode.com/charts/usd-transfer-volume
Stablecoin market value and trading volume
Source: https://coinmarketcap.com/charts/
Tether's profit for the first three quarters of 2024
Source: https://tether.io/news/tether-hits-7-7-billion-2024-nine-month-profits-102-5-billion-in-u-s-treasury-holdings-almost-120-billion-usd₮-circulation-and-an-over-6-billion-reserve-buffer-in-q3-2024-attestation/
With the approval of Bitcoin and Ethereum spot ETFs in 2024, the influx of funds has driven the total market value of the cryptocurrency industry to a new high. We expect that with the growth of industry market value and the continuous expansion of the user base, stablecoins are also expected to break historical records in multiple key data indicators, such as market value scale, transaction volume, and trading volume.
Evolution of the stablecoin market landscape
The birth of stablecoins is rooted in the strong demand for price-stabilizing tools in the cryptocurrency industry. In the early stages, mainstream cryptocurrencies like Bitcoin and Ethereum, due to their high price volatility, were difficult to serve as stable units of account. Stablecoins, by pegging to fiat currencies like the U.S. dollar, provided a relatively stable value storage and trading medium. This enables users to hold a digital asset that can withstand market fluctuations and facilitate quick fund transfers. With the increasing market demand for stablecoins, various types of stablecoins have gradually emerged, including fiat-backed stablecoins, decentralized collateralized stablecoins, and algorithmic stablecoins. These stablecoins offer users diverse options to meet different market needs and risk preferences.
In exploring the stablecoin market, we will focus on analyzing several representative stablecoins. These include USDT issued by Tether, USDC issued by Circle, DAI/USDS issued by the MakerDAO protocol, and the algorithmic stablecoin UST issued by Terra. Through a basic analysis of these stablecoins, we aim to understand the characteristics and market performance of different types of stablecoins.
USDT, as an early entrant in the cryptocurrency market, has gained widespread market support and recognition since 2018. It is accepted by numerous exchanges and has further penetrated the primary and secondary markets, DeFi protocols, many public chains, and Layer 2 after 2020. Therefore, USDT's market share has maintained a leading position. Currently, the underlying assets of USDT mainly include U.S. Treasury bonds and overnight reverse repos. Due to the lack of real-time updates on the transparency of these assets, USDT has historically encountered several de-pegging events, with the maximum deviation approaching 10%. Nevertheless, thanks to its first-mover advantage and global applicability, USDT still dominates the spot and derivatives trading volume in mainstream exchanges. Mainstream exchanges generally regard USDT as the core pricing currency pair, even though they also support other stablecoins like USDC or FDUSD, USDT's trading volume and market depth still far exceed those of other stablecoins.
Tether's Q3 2024 Reserves report
Source: https://tether.to/en/transparency/?tab=reports
Tether's past transparency reports
Source: https://tether.to/en/transparency/?tab=reports
USDC, issued by Circle, which has strong regulatory resources and multiple asset management licenses. Since its launch in October 2018, USDC has long become the second-largest stablecoin in the cryptocurrency market, with a market share of about 20.9%. Based on its excellent compliance and transparency, the underlying assets of USDC are mainly comprised of cash in U.S. dollars, short-term Treasury bonds, and U.S. overnight reverse repo agreements. Most of the USDC reserves are held in the Circle Reserve Fund (registered with the SEC as a 2a- government money market fund), which provides daily investment portfolio reports through BlackRock to ensure transparency. At one point, the issuance of USDC nearly approached 77.6% of USDT, but during the bankruptcy of Silicon Valley Bank (SVB) in March 2023, around $3.3 billion of Circle's USDC reserves were held in SVB, a small part of its total reserves of $40 billion. This news triggered market panic, leading to a sharp drop in USDC prices and de-pegging phenomena, even triggering a bank run. However, with the joint rescue plan of the Federal Reserve and the Treasury, Circle announced that the deposits in SVB were 100% secure, and market panic gradually subsided, with USDC prices returning close to normal levels. After this incident, the vulnerability of USDC in the face of traditional banking system risks was fully exposed, leading to a declining trend in its issuance. To enhance USDC's stability and transparency, Circle implemented a series of measures. Although its market share has not recovered to previous highs, USDC's inherent compliance still keeps its on-chain trading volume and other key data competitive with USDT.
Circle Reserve Fund
Source: https://www.blackrock.com/cash/en-us/products/329365/
DAI/USDS is a decentralized stablecoin issued and managed by MakerDAO, designed to maintain a fixed exchange rate of 1:1 with the U.S. dollar. Initially, DAI was generated through an over-collateralization mechanism, allowing users to lock up crypto assets (such as Ethereum) in the Maker protocol's smart contracts to generate DAI. This mechanism requires the value of the collateral to be greater than the amount of DAI generated, ensuring the stability of DAI's value. However, during periods of severe price fluctuations, DAI may lead to cascading liquidations, and the transparency of on-chain transactions makes the liquidation thresholds of minters easy targets for directed attacks, leading to liquidation failures and bad debts. To mitigate these risks, MakerDAO has introduced more collateral options, such as USDC and wBTC, and established a dedicated risk management team. The decentralized nature of DAI provides unique advantages in certain application scenarios, playing a core role in the DeFi field, not only as a trading medium but also widely used in various financial activities such as lending, payments, and staking. Despite having a smaller market share compared to centralized stablecoins like USDT and USDC, DAI still holds a place in the global stablecoin market.
Collateral list of DAI / USDS
Source: https://makerburn.com/#/rundown
UST, as a decentralized algorithmic stablecoin in the Terra ecosystem, aims to maintain a fixed exchange rate of 1:1 with the U.S. dollar. It relies on the smart contracts of the Terra blockchain, using Luna tokens as value support. Users destroy an equivalent amount of Luna when minting UST and redeem an equivalent amount of Luna when destroying UST, thereby maintaining price stability through the behavior of market arbitrageurs. During periods of rising Luna prices, the mechanism of UST can facilitate a positive cycle, known as a 'positive spiral' rise. However, when Luna prices drop, it becomes difficult for Luna's market value to support UST's market value, and UST can easily fall into a 'death spiral,' where price drops lead to de-pegging. UST once provided high yields through the Anchor Protocol, attracting user deposits, thus expanding its scale, becoming one of the major stablecoins in the market. Unfortunately, during the collapse of the Terra ecosystem in May 2022, UST's price stability mechanism faced severe challenges, ultimately leading to its decoupling from the U.S. dollar and its price dropping to zero. This event highlighted the risks and challenges of pure algorithmic stablecoins in market confidence and algorithmic design, especially under extreme market conditions, where these challenges become particularly apparent.
It can be seen that fiat-backed stablecoins have already occupied a large part of the stablecoin market and the market scale continues to grow. However, due to the ever-emerging trading demands in the market, decentralized issued stablecoins have been exploring new paths. Among them, Ethena has stood out as a leader, with its issued USDe, as a synthetic dollar, occupying a place in the DeFi field with its innovative financial solutions. The characteristic of USDe lies in its advanced Delta hedging strategy to maintain its peg to the dollar, making it stand out among traditional stablecoins. In addition, the USD 0 issued by Usual is also worth attention. This stablecoin integrates the robustness of traditional financial tools with the transparency, efficiency, and composability of DeFi by introducing RWA as underlying support. USD 0, with its permissionless and compliant framework, directly feeds back real returns from RWA to community users, showcasing the competitiveness of new stablecoins in the market. The emergence of these new stablecoins not only enriches the market diversity but also brings users more choices and investment opportunities.
Core metrics of crypto-native stablecoins
We define stablecoins that do not rely on fiat backing, such as USDe and USD 0, as 'crypto-native stablecoins.' These stablecoins include those collateralized by mainstream cryptocurrencies like Bitcoin and Ethereum, algorithmically pegged stablecoins, and stablecoins that adopt neutral strategies to anchor value.
In evaluating these crypto-native stablecoins, we will consider multiple dimensions, among which the most important are the stability of the stablecoins, market value scale, and application scenarios (including DeFi integration and support from centralized exchanges).
Stability is a key indicator for measuring the value of stablecoins. The core value of stablecoins lies in their value stability, meaning they can maintain a stable exchange rate with the pegged asset. If a stablecoin cannot maintain this peg, its 'stability' characteristic will be called into question, thus losing its fundamental function as a stablecoin.
Under the premise of ensuring the price anchoring of stablecoins, stablecoins must achieve a certain market scale to become mainstream currencies and occupy a place in the financial ecosystem. If a stablecoin cannot achieve scale expansion, its influence and practicality will be limited, making it difficult to have a significant impact in a highly competitive market.
The market scale of stablecoins depends on the breadth of their application scenarios. Stablecoins lacking practical application scenarios, no matter how large their market value is, will find it difficult to solidify their market position, just like a tree without roots. Therefore, stablecoins must exhaust all means to gain a broader user base and diversify application scenarios to ensure their value stability and enhance liquidity.
Why we invest in Ethena
Ethena's vision is to reshape the cryptocurrency system by establishing a bridge between DeFi, CeFi, and TradFi, to foster the prosperity of next-generation internet finance. Its first stablecoin, USDe, has achieved deep integration in several key areas of DeFi, including money markets, collateral for derivatives markets, stablecoin infrastructure, interest rate swap protocols, and spot AMM DEXs. In the exchange sector, Ethena's liquidity pool not only supports existing centralized and decentralized trading platforms but also helps emerging exchanges solve liquidity challenges during their initial startup phase, becoming a leading provider of depth and off-market liquidity. For TradFi, Ethena's USDe is favored for its unique yield, merging the local actual yields of two billion-dollar-scale cryptocurrencies, with its yields showing a weak negative correlation with traditional financial interest rates, and the underlying assets are held by custodial institutions recognized by TradFi. USDe provides large investors with a convenient avenue to gain excess returns in the cryptocurrency market through a single asset. As actual interest rates decline, the growing market demand for speculation and leverage in cryptocurrencies is expected to further boost the yields of Ethena's USDe, making it a significant driver for attracting TradFi entities with trillions of dollars to invest in the Ethena ecosystem.
Delta neutral synthetic dollar USDe
The USDe stablecoin launched by Ethena, as a crypto-native asset, differs from dollar stablecoins that rely on traditional assets such as U.S. Treasury bonds for underlying support. Its issuance mechanism involves holding mainstream cryptocurrencies in spot and establishing short positions on exchanges. This innovative model of stablecoin plays an important role in the market, not only locking the value of mainstream crypto assets but also injecting liquidity into the derivatives market. Especially during bull markets, as the prices of mainstream assets rise and the scale of derivative contracts expands, the scale of USDe also grows accordingly. In addition, the short funding rate of USDe provides holders with a more attractive yield compared to traditional stablecoins like USDT. This advantage attracts more users to choose USDe, further promoting the expansion of USDe's scale.
Minting, redemption, and staking
The minting process of USDe allows users to exchange USDe by sending underlying assets to the protocol, while redemption involves users destroying USDe to redeem the original supporting assets. Staking USDe allows users to lock USDe in smart contracts to earn yields. When users stake USDe, they receive sUSDe, whose value increases with the accumulation of protocol yields. Users can unstake sUSDe at any time to obtain USDe after value accumulation.
Delta neutral anchoring mechanism
The anchoring mechanism of USDe mainly achieves stability relative to its underlying supporting assets through the execution of automated and programmatic Delta neutral hedging strategies. This strategy offsets the risk of price fluctuations of spot assets by establishing short positions in the derivatives market equal to the value of the spot assets, thus keeping the synthetic dollar value of USDe relatively stable under most market conditions. Additionally, the income sources of the Ethena protocol, including spot staking yields and funding rate yields from short positions, further enhance the stability of USDe. Through this series of mechanisms, USDe can become a reliable trading medium and value storage tool in the crypto market, maintaining a stable peg to the U.S. dollar.
Hedging strategies and risk control
Ethena's hedging mechanism is a system composed of off-chain application services that interact with on-chain smart contracts and the Ethereum blockchain. It is responsible for obtaining market data, verifying data integrity, calculating risk exposure, coordinating internal system information, publishing the minting and redemption prices of USDe, determining order routing and execution locations, real-time verification of information and operational integrity, monitoring the availability of dependencies, coordinating collateral flow, and publishing real-time developments. This system focuses on protecting the protocol’s collateral to ensure the stability of USDe and the real-time integrity of the system. Additionally, Ethena has a deep understanding of various potential risks, including smart contract risks, external platform risks, liquidity risks, custodial operational risks, counterparty risks from exchanges, and market risks. To address these challenges, Ethena actively takes measures to mitigate and diversify these risks to enhance the robustness and reliability of the entire system.
Transparency and fund security
The core value of stablecoins lies in their anchoring ability, which means maintaining the stability of the value of the fiat currency to which they are pegged. Historically, some stablecoins like USDT and USDC have experienced de-pegging events due to insufficient transparency and imperfect risk control mechanisms. To address this, Ethena ensures the stability and transparency of its asset management through multi-signature and asset custodial mechanisms, as well as deep cooperation with exchanges. Furthermore, in response to rate fluctuations in extreme market conditions, Ethena has established sufficient reserve funds. This series of strategies not only enhances the credibility of USDe but also provides solid security guarantees for the returns of USDe, ensuring the interests of holders and the stability of the market.
TradFi-friendly digital dollar USDtb
USDtb is an institutional-level stablecoin backed by BUIDL from the world's largest asset management company, BlackRock, with backing assets including high-quality short-term Treasury bonds, ensuring its exceptional security and trustworthiness. In the DeFi field, USDtb is not only fully accessible and easy to integrate but also can be used as collateral in centralized exchanges and major brokerage firms, providing traditional financial institutions with direct access to DeFi. Furthermore, USDtb has unique on-chain direct minting and redemption mechanisms, achieving 24/7 service and further enhancing its competitiveness and convenience in the digital asset market.
As a product independent of USDe, USDtb offers users a new choice with distinctly different risk characteristics. Its existence enables USDe to respond more effectively to market challenges, especially during periods of negative funding rates, where Ethena can close the hedging positions of USDe and reallocate assets to USDtb to mitigate related risks and enhance the entire system's stability and risk resistance.
ENA token design
The ENA token plays a key role in the Ethena ecosystem, serving as a governance token that grants holders the right to participate in key decisions, such as electing members of the risk committee and shaping policy direction. It also provides opportunities for staking to become sENA to earn additional yields. As ENA will be used as a voting tool for the Ethereal derivatives exchange in the future, its importance in Ethena's development blueprint is becoming increasingly prominent. These functions not only solidify ENA's status as the core of the Ethena protocol but are also crucial for maintaining the protocol's decentralized governance and incentivizing user participation.
In terms of liquidity, ENA has excelled in mainstream exchanges, consistently ranking among the top in trading volume, which not only proves the market activity of the Ethena protocol but also indicates its broad recognition and acceptance in the market.
Operational resources
Ethena implements a series of hedging strategies to address sudden events in the derivatives market, ensuring the stability and safety of USDe by deeply cooperating with major exchanges. Additionally, the use of USDe as a trading pricing currency pair is gradually being realized, thanks to Ethena's efforts to increase liquidity to mitigate risks. In terms of resources, Ethena collaborates with several top global market makers, who provide liquidity and market depth, further enhancing the market adaptability and resilience of USDe.
Source: https://ethena.fi/ecosystem
Future prospects of Ethena
In the stablecoin sector, the competitive landscape is far from certain. Although USDT and USDC hold leading positions, emerging competitors are fully capable of challenging their market positions. The key lies in choosing those stablecoin protocols with unique mechanisms that can stabilize value anchoring, increase market value, and expand application scenarios. Just as DEX has already captured 10% of CEX trading volume, decentralized financial products are rapidly seizing market resources due to their verifiability and convenience. We expect that by 2025, decentralized stablecoins represented by Ethena will continue to grow in market scale, reaching a market share of 10%, equivalent to $20 billion.
At the same time, we believe that Ethena will become one of the important financial tools for implementing Trump's policies. The implementation of Trump's policies will also promote Ethena's strategic position in the revival of the U.S. economy and the reshaping of global finance, becoming an important support for the domestic and global digital financial ecosystem. ArkStream Capital, as an industry pioneer, will witness this great transformation of the decentralized financial era together with Ethena.
