Analysis of Ethereum’s synthetic dollar project ENA: an alternative “big short” in the bull market

Source: On-Chain View

What do you think of Binance launchpool’s newly launched Ethereum stablecoin synthetic USD project @Ethena? As far as data is concerned, it has accumulated more than US$1.5 billion in assets in three months since it was launched, and market expectations are extremely hot. However, after the Luna thunderstorm incident, talk of "reliance" has changed today. What will the emergence of Ethena bring to the Crypto world? Let me briefly outline a few personal opinions:

1) Any innovative on-chain stablecoin synthetic asset project has a basic value: it reduces users’ dependence on the traditional fiat currency banking system, because traditional The financial system does not support users to convert between U.S. dollars and cryptocurrencies quickly and efficiently.

BitMEX founder Arthur Hayes once profoundly elaborated on this fact in an article titled "Dust On Crust": When more and more crypto assets are separated from the exchange of fiat currencies, it is equivalent to the banking system. In order to grab the market cake, the banking system is not willing to provide services for crypto assets. Some banks that are willing to serve are only seeking to gain short-term high profits. This will bring backlash pressure to the crypto market to some extent.

The optimal solution is that the Crypto market needs a synthetic dollar system that does not rely on the traditional banking financial system, just like Satoshi Nakamoto’s original intention of inventing Bitcoin.

2) So, how does Ethena achieve the goal of stripping away the traditional banking system? Specifically, Ethena labs uses ETH as the underlying asset. When a user injects a certain amount of stETH assets into the protocol, the platform will Mint the corresponding USDe stablecoin asset. In order to ensure that the USDe value is always stable at around 1 US dollar, the platform has introduced A special mechanism: using the method mentioned in Arthur’s article to hedge cryptocurrency and equal futures short perpetual contract positions.

When the price of ETH rises, the price of ETH held by the platform increases, but its reverse perpetual contract will cause losses. On the contrary, when the price of ETH falls, the price of ETH held by the platform will cause losses, but Its inverse perpetual contract will bring profits. Yes, this is almost consistent with the hedging concept we are accustomed to as individual users.  

3) As a stable currency issuance platform, how can it continue to benefit and hedge the corresponding risks?

1. In order to avoid the uncontrollable black swan thunder risk when stETH is deposited into CEX (FTX exchange), Ethna directly deposits it into custody platforms such as Cobo and CEFFU to avoid the huge risk of out-of-control liquidity;< /p>

2. Hold a large amount of stETH deposited by users. The platform can deposit it into the Ethereum POS consensus system to obtain a stable 3-4% APY income;

3. Potential income such as funding rates and spreads generated by the platform’s contract position transactions on the derivatives platform (APY is about 27%);

4. If the elite traders of the platform can make high-probability and accurate predictions about the supply, demand and market price of stablecoins in the market, they can also maximize their profits. At the same time, it can also continue to increase the supply of stable coins: for example, when the platform determines that the supply of stable coins in the market has increased, it can sell crypto assets and go long in the market. On the contrary, it will continue to add crypto assets and go short in the market. Of course, in the long run, Look, the platform will definitely aim to increase the supply of stablecoins. The timely change of strategies in the process is the "space" to increase profits.

4) The four profit factors mentioned above can only relatively reduce risks. Some potential risks actually exist objectively, such as:

1. The security of staking to POS Validators Sexuality and stability risk (Slash);

2. The risk of loss when a trader makes a strategic mistake in opening a perpetual contract position on CEX, and misjudges the supply and demand trend of stablecoins. Going long makes money but the supply of stablecoins The risk of stagnant business volume;

3. The risk of contract transaction funding rates;

4. If stETH is used, there is a potential liquidation risk of price breakdown, etc. (probability lower).

In short, Ethena’s philosophy of existence is based on the strong demand for stablecoins in the Crypto world. Therefore, as a newly issued stablecoin asset, it will definitely be popular in the market. The growth of TVL during this period and Binance’s launchpool activity expectations have been verified: everyone is afraid of stablecoin synthetic assets, and everyone is looking forward to stablecoin synthetic assets. Especially a stablecoin project that can continue to bring high APY with as little Ponzi risk as possible.

I personally believe that Ethena’s entry point anchored by reverse hedging positions in the contract market needs to be continuously observed, because the platform’s expansion of stablecoin issuance is destined to become a market leader to a greater extent. The Big Short”.

In a market trend that continues to be bullish, it would be good if the issuance of stablecoins is the main motivation, but if the platform becomes more profit-oriented, it would like to capitalize on the already stretched Ethereum DeFi protocol. Scraping profits while also relying on trading strategies to maximize profits, which is very challenging in the current unstable trading market.

However, the market always seems to be repeating similar stories. Big bull markets always seem to rely on some new financial assets or special models to detonate. Anyway, with a cautious attitude, just wait and see what happens. .