Ethena has been in the news lately, with its native token ENA up a staggering 100% since its launch in early April 2024. Amid widespread market attention, Ethena, which replicates common hedge fund trades, is becoming a hot topic. Attracting a lot of investment. However, the staking yield offered by Ethena has soared to a staggering 37%, raising questions about its sustainability. (Follow me to see the homepage introduction Jinqun)
Ethena and its USDe stablecoin, Ethena and its synthetic USDe tokens achieve their goals through a cryptocurrency strategy similar to basis trading, taking advantage of price differences between spot and futures markets. This strategy is known as cash holding trading in the cryptocurrency space and has recently shown significant profitability amid soaring token prices and funding rates.
The mechanism is as follows: Traders generate USDe tokens using an automated system by depositing stETH (a derivative of Ether) and other approved tokens.
Subsequently, Ethena Labs, the entity behind USDe, initiates short positions through Ethereum futures and perpetual swaps (a crypto futures contract that is open indefinitely).
These short positions were established on various cryptocurrency exchanges, including Binance. These short positions allow holders of the USDe derivative sUSDe locked in the project to take advantage of extremely high funding rates, which have exceeded 100% annualized during this year's bull run.
Managing Risk-Reward
Obviously, the incredibly high returns offered by Ethena come with some high risks. However, looking back at the collapse of the Terra ecosystem, the massive gains of the TerraUSD token proved to be too good to be true.
The design of Ethena is not similar to TerraUSD, however, and the challenge for investors is to determine what could go wrong with that asset class. Robert Leshner, partner at fintech venture fund Robot Ventures, said:
“It’s essentially a tokenized hedge fund that manages some kind of complex trading strategy across many different trading venues. The worst case scenario is that the performance of the hedge fund does not match the implied financing rate of all these different cryptocurrency exchanges for a variety of reasons.”
Through the entire mechanism around the USDe token as described above, Ethena is committed to building a centralized cryptocurrency that maintains a stable value while paying attractive returns.The DeFi market relies heavily on centralized stablecoins such as USDT and USDC. Compared to these tokens backed by tangible assets, USDe relies heavily on stETH for support.
One concern is that Ethena’s performance only proves the effectiveness of the strategy in a bullish market environment.
Ethena acknowledges various risks associated with USDe on its website. These include funding risk, which presents potential losses if funding rates turn negative for a long time. Exchange risk also comes to the fore given the uncertainty in the cryptocurrency market after FTX.
In addition, custody risk is mentioned, as the project relies on third-party partners to protect customers’ assets. Collateral risk is another factor, with Ethena using stETH as collateral for its derivatives positions. This could pose challenges if the value of stETH drops significantly compared to ether. Ether has experienced a recovery in the crypto market this year, rising by about 50% so far in 2024.
