Former DeFi celebrity Andre Cronje expressed concerns about the emergence of "new stablecoins" because the timing and theme coincide with the issuance of Ethena currency, because the community believes that he is referring to the stablecoin project Ethena, which was recently strongly supported by BitMEX founder Arthur Hayes.
(Ethena token ENA airdrop starts! MakerDAO proposes to invest 600 million in USDe)
Ethena’s token ENA is positioned as a governance token, but so far, it has not yet fulfilled its actual function. However, the price of the token continued to rise as soon as it was listed, surprising many people.
Here are his thoughts:
"The risks of this new agreement are very high"
Every now and then something new comes out in this field. I often find myself in the middle of a broad curve for long periods of time. I feel comfortable here. Still, there are some events in the industry that I wish I had been more curious about, and there are also some events that I definitely didn't expect.
I was pretty sure that UST would fail, the mechanics of it just didn't make sense to me, however, a lot of people who I thought were very smart were pretty adamant that it wouldn't fail, which convinced me that "I was wrong." As for FTX, I didn't expect it to fail. When people ask me if I think they should withdraw their money, my default response is "yeah, why take the risk", but that's my default response to any asset held on an exchange. I didn't see the FTX thing coming. I add this preface to say that often I simply don’t know.
Nonetheless, there is a new original concept that is getting a lot of attention and I see it being integrated into protocols that I consider to be very low risk, but from my understanding (perhaps incorrectly), this new protocol is very high risk.
So, I don't want to name names, I want to ask people who are smarter than me, where did I get it wrong, I've looked through all the visible documents, read other people's assessments, and I still can't see what the risk is mitigated.
The irrationality of Ethena’s mechanism
First, it is the component of this mechanism;
Perpetual Contract –
In a normal spot transaction, you simply buy the asset. (More specifically, you sell an asset (short the asset) and buy the corresponding asset (long the asset). For example, in the BTC/USD trade, you are buying (long) BTC, And sell (go short) USD.)
If the value of BTC rises against USD, you make a profit. We call these spot trades because even if the value of BTC/USD drops, you still own the BTC asset.
Perpetual trading is a tool that is similar to trading, but does not require any assets involved in the transaction. It is a bit like directional gambling rather than trading.
A very unique mechanism of perpetual trading is that buyers (longs) and sellers (shorts) need to pay a "funding rate". If buying demand significantly exceeds selling demand, sellers will receive a "positive fee" and buyers will receive a "negative fee". This is to ensure that the perpetual price moves closer to its spot price (this mechanism is the same as the lending rate).
In order to keep your position open, you need to provide margin, which is actually the collateral that "funds" your "funding rate debt." If the funding rate becomes negative, it will gradually drain your collateral until your position is closed.
Margin/Collateral –
The next part of the mechanism is yield-based collateral, an asset that will grow in value if held, in this case stETH.
So if I have 1 stETH, I am long stETH, so if I open a short perpetual position of 1 stETH, I am theoretically "neutral". Because even though I lost $100 on short stETH, I made $100 on long stETH. The above statement is ignoring that the only place you can find that accepts stETH as margin collateral is ByBit. The above also ignores funding rates.
Mechanism – almost impossible to achieve
The theory here is that you can achieve "neutral" by purchasing $1,000 of stETH and using this as collateral to open a $1,000 stETH short position, and at the same time obtain stETH income (about 3%) + any funding fees rate paid.
I am not a trader, except for some experimental trading to build DeFi products, which I admit is not my area of expertise. I tried to compare these instruments to what I knew they had in common, which was collateral and debt.
In my experience, eventually you need to close the position (no longer neutral), or be liquidated. So now I'm assuming the theory here is, "these positions will just be closed when the market turns", but that's a bit like saying "only buy when BTC goes up and sell when it goes down", why does this sound like a Joke because "it sounds easy" but is actually almost impossible to achieve.
So, when everything is going well (because the market is positive and funding rates for shorts are positive [because everyone is happy to go long]), eventually things turn and funding becomes negative and margin /The collateral is liquidated and you are left with an unbacked asset.
The counterargument to this is the “Law of Large Numbers,” which is almost identical to UST’s $1 billion BTC fund and the like. "It works until it doesn't."
So, I'd like to ask the larger community of wisdom to help me understand where I'm going wrong, and what I'm missing.
This article Old DeFi generation celebrity Andre Cronje comments on Ethena: The mechanism is almost impossible to practice first appeared on Chain News ABMedia.
