Ethena USDe Market Supply on a Meteoric Rise Amidst ENA Token Slump: Will It Follow Other Stablecoins' Collapse?

Record-Breaking $3B Milestone Achieved in Crypto History

Ethena Labs is embarking on a feat unparalleled in the cryptocurrency realm.

The project has made history by having its synthetic dollar (stablecoin) surpass the $3 billion mark in an unprecedented timeframe.

Ethena's USDe achieved this milestone in just four months post-launch, a remarkable pace compared to Terra's algorithmic stablecoin, UST, which took nearly a year to reach a similar valuation—an accomplishment overshadowed by its infamous and rapid collapse.

Guy Young, the founder of Ethena Labs, asserted that this is merely the beginning for Ethena.

He envisioned the market capitalisation of its futures-backed stablecoin doubling within the next six months.

This projection seems plausible, given Ethena's offer of a 33% yield on deposits, although it may also evoke caution among investors.

Furthermore, Ethena Labs has become the highest-earning protocol in the industry within three weeks, setting a new standard for decentralised finance (DeFi) interest rates and growing its Reserve Fund to over $25 million in a single month.

At the time of writing, the supply is close to $3.5 billion.

Ethena in Midst of Sats Campaign

1 April marked the conclusion of Ethena's inaugural Shard Campaign, a pre-token campaign that lasted a mere six weeks—one of the briefest in the industry.

This campaign also coincided with the launch of the ENA token.

Immediately following on 2 April, the Sats Campaign commenced, offering a second round of incentives.

Participants can claim their ENA tokens from 2 April, concurrent with the token's listing on centralied exchanges (CEXs).

The largest wallets will be subject to a 50% linear, pro-rata vesting schedule over six months.

Any tokens left unclaimed or unvested due to early exiters will be redistributed to loyal users who continue to engage with Ethena.

Users who were active during the first season and remain participants in the Ethena ecosystem will enjoy enhanced loyalty rewards during the Sats Campaign.

This campaign is aligned with Ethena's latest product enhancement: the integration of Bitcoin (BTC) as a backing asset, which is expected to bolster the growth of USDe beyond $10 billion in supply.

The Sats Campaign is set to run for five months, until 2 September 2024, or until USDe's supply reaches $5 billion, whichever occurs first.

Users had a 30-day window to claim their ENA tokens following the launch; after this period, any unclaimed tokens were redistributed to users who persist in their involvement with the Ethena ecosystem by holding and utilising USDe in various applications during the second incentive season.

The framework of the Sats Campaign, in its initial phase, closely resembles the first season, with elevated rewards to acknowledge the pivotal role that early adopters have played in Ethena's success.

Any user who took part in the Shard Campaign will receive amplified rewards for their participation in the Sats Campaign, provided they continue to meet the vesting criteria.

Users already locked into pools from the Shard Campaign need not take any further action to begin earning the enhanced rewards offered by the Sats Campaign.

Ethena's ENA Token Among Other Altcoins in a Slump

The cryptocurrency industry was engulfed in a sea of red on 5 July as Bitcoin's price plummeted beneath the critical support level of $55,000.

The majority of altcoins, including ENA, Solana (SOL), and EOS, experienced declines exceeding 10% over the past 24 hours.

The aggregate market capitalisation of all cryptocurrencies fell from its year-to-date peak of $2.7 trillion to $2 trillion.

This downturn coincides with other risks confronting these digital assets.

Bitcoin has already breached the neckline of its significant double-top pattern, indicating the potential for further losses.

Given the weak technical and fundamental indicators facing cryptocurrencies, there is a likelihood that they will continue their downward trajectory in the near term.

At the time of writing, ENA is trading at $0.408, over 50% decline in the past month.

What is Ethena?

Ethena is the architect of USDe, a synthetic dollar backed by a diverse array of assets including ETH, stETH, BTC, and USDT.

Unlike traditional stablecoins, USDe does not depend on conventional financial infrastructure or require overcollateralisation.

Operating on the Ethereum blockchain, Ethena employs a delta-neutral strategy to uphold the stability of its synthetic dollar.

Ethena is a protocol designed for the minting, redemption, and staking of USDe through processes governed by smart contracts.

It oversees critical functions such as minting, redeeming, collateral and risk management, staking, and other facets of USDe's operation.

The protocol is composed of smart contracts, position management algorithms, and off-protocol operations that work in concert to ensure USDe's smooth functioning.

The project's objective is to craft a crypto-native financial solution by developing a synthetic asset that closely tracks the value of the US dollar.

Although USDe is not a stablecoin in the traditional sense like USDT or DAI, its price is intended to remain close to one US dollar.

To safeguard USDe against the volatility of underlying assets, Ethena opens a short position on the collateral asset in derivatives exchanges, equivalent to the notional amount of spot backing held.

This approach is designed to maintain USDe's stability, even in adverse market conditions.

In a nutshell, Ethena's goal is to provide a synthetic dollar that can be utilised across various DeFi applications, free from reliance on traditional financial infrastructure.

Ethena's Origins Started Out as an Idea

Ethena and its synthetic dollar, USDe, are inspired by a concept first introduced by Arthur Hayes, a prominent figure in the crypto industry and co-founder of BitMEX.

Approximately a year ago, Hayes authored the "Dust on Crust" article, which explored the role of stablecoins in the cryptocurrency market and the inefficiencies and drawbacks of traditional finance.

He discussed the limitations of existing stablecoins and proposed a stable token that would utilise long spot and short perpetual swap positions.

While Hayes's discussion centered on Bitcoin (BTC), Ethena has adapted this concept by leveraging Ether and its distinctive features, such as Liquid Staking, to achieve a similar delta-neutral position.

The process begins with users depositing collateral into the Ethena protocol, which may include assets like stETH, USDC, or USDT.

Ethena then engages in "delta hedging" by staking this collateral and simultaneously opening an equal short position to offset the long position inherent in the collateral.

The core idea is simple: users provide collateral for USDe and stake it to earn a yield, while Ethena maintains balance by holding a short derivatives position to mitigate the risk associated with the deposited collateral.

Ethena's USDe system can be viewed in two layers.

The foundational layer is USDe itself, where users deposit crypto assets as collateral, and Ethena performs a balancing act by staking the collateral and shorting it in the futures market to neutralise price volatility.

The upper layer is the Internet Bond, an innovative financial product that capitalises on the yield-generating activities of USDe.

This bond is not merely an adjunct to USDe; it is directly linked to it, accruing value as the protocol adeptly manages the cash and carry trade strategy while ensuring USDe's stability and scalability.

Guy Young, the founder of Ethena, who has a robust background in traditional finance, has taken on the challenge of refining and enhancing Hayes's concept to address a critical need in the crypto space: a liquid, scalable, and censorship-resistant synthetic dollar.

The aspiration to create a stable currency independent of the traditional financial system is a significant endeavour that Ethena is committed to achieving.

Will Ethenas USDe Follow in the Footsteps of Terras UST Collapse?

What are the critical differences and similarities between Ethena's digital dollar initiative and Terra's infamous $40-billion debacle?

The parallels with Ethena's endeavour are striking: both aim to create a digital asset that maintains a 1:1 peg with the dollar, without being backed by actual dollars or bank-held assets, and both entice users with yields significantly higher than traditional options.

Additionally, both projects have established insurance funds as a contingency for potential issues.

However, it would be remiss to dismiss USDe as a mere copycat of Terra's UST.

Young expressed:

“After what we saw last cycle for people to ask these questions — if we didn't, I think that that would be more worrying."

Unlike leading stablecoins like Tether and USDC, USDe is not backed by bank-held assets.

Instead, it is supported by futures positions initiated when funds are deposited into the project.

Users can mint USDe by depositing bitcoin, ethereum, and ether-based liquid staking tokens, while Ethena opens corresponding short perpetual positions on a derivatives exchange, maintaining a "delta-neutral" hedge.

This approach allows Ethena to differentiate itself from other stablecoins, such as USDC, which can encounter problems if their custodial banks face issues, as seen with Silicon Valley Bank in 2023.

He evaluated:

“I think what we learned that weekend was that we couldn't have our entire system sort of relying on the US banking system. There is some value in basically creating diversification away from that custodial risk, and so in essence, all we're doing is just really replacing the custodial risk of assets sitting outside of our own ecosystem to one that's sitting within it.”

While Terra's stablecoin also aimed to avoid such issues, its failure to maintain its peg was rooted in the corresponding LUNA token acting as collateral, which exposed it to the risk of a "bank run."

Ethena's structure and yield generation differ from Terra's.

USDe's yield is derived from exogenous market dynamics, such as positive funding rates on perpetual contracts, where long positions pay short positions.

This dynamic is favourable for Ethena's yield as long as it remains constant.

However, when funding rates change, yields can deteriorate, and unwinding positions can become more costly.

In assessing risks, it is crucial to balance the allure of high yields with the potential for loss, a lesson learned from Terra, where high yields drew users who may not have fully considered the downside.

Ethena's plan to manage chaos is reminiscent of Terra's, with an insurance fund to cover negative funding rates.

However, as Ethena's market share grows, finding counterparties for trades may become challenging, especially in times of market distress.

Terra's attempt to build a defence fund was ultimately futile, as its Bitcoin reserve did not prevent its collapse.

Ethena has accumulated over $40 million in a similar fund, which could provide a buffer for weeks or months, depending on market conditions.

Young explained:

“The very basic idea here is when times are good and the yield is so excessive to the upside, you're clipping a bit of the yield and putting it in a rainy day fund. And then to the extent that funding comes down and the yields are less attractive, you can sort of tap into that when times aren't as good.”

Despite the parallels to Terra, Ethena's synthetic dollar continues to attract capital at a rapid pace.

The project's governance token, ENA, which is not directly integrated into USDe's mechanics, has seen a 50% increase year-to-date.

Young anticipated that most of the adoption will come from crypto-native users, as USDe is added as collateral on trading platforms.

Expanding beyond the crypto realm may be challenging due to the lingering impact of Terra's failure, but Young is undeterred by sceptics.

He said:

“I want to have these discussions so that people are at least aware of the type of products that they're walking into. And that's sort of the most important thing from my side, which is, treat people like adults. They can make risk decisions by themselves. I think it's one of the more beautiful things about crypto is that it sort of enables you to make those decisions.”

Meet the Inceptor & the Maker

Arthur Hayes, Inceptor of the Ethena Idea

The Ethena Protocol is an innovative financial framework born from Hayes visionary 2023 blog post, "Dust on Crust."

He proposed a synthetic, crypto-native dollar using Bitcoin as collateral and shorting perpetual swaps.

This approach, predating stablecoins, exploits cryptocurrency derivatives to sidestep traditional financial systems.

‘His endorsement of Ethena was crucial, garnering significant attention and support from major CEXs.

His industry reputation and past successes lent substantial credibility to Ethena, enabling unprecedented collaboration with leading exchanges like Binance, OKX, and Huobi.

Hayess active promotion and investment have been instrumental in propelling the project's success and acceptance within the crypto community.’

His socials: X and LinkedIn

Guy Young, Founder

Young is the founder of Ethena Labs.

Before establishing Ethena, he spent nearly a decade in traditional finance, working in investment banking, hedge funds, and private equity, most recently at Cerberus Capital Management, a $50 billion investment fund.

His achievements led to his role as Head of Principal Investments at a Cerberus affiliate, where he spearheaded the firms expansion into Australian markets and managed strategic investments in banking, specialty finance, insurance, fintech, and more.

Inspired by Hayes’ vision, Guy assembled a team to develop the Ethena Protocol.

While retaining the essence of Hayes’ concept, the team chose to start with staked Ether (stETH) instead of Bitcoin, recognising the yield advantages of stETH.

This strategic choice integrates two significant sources of crypto-native yield—staking and derivatives trading—into a unified financial instrument, enhancing the protocol's potential.

His socials: X and LinkedIn

Alex Fowler

There is some ambiguity regarding Alex Fowler's role at Ethena Labs.

His LinkedIn profile identifies him as a founding member of Ethena, while other sources list him as simply the Head of Operations.

In this capacity, he is responsible for overseeing the day-to-day activities of Ethena Labs, ensuring smooth and efficient operations.

His social: LinkedIn

Ethena's Socials

Website

X

LinkedIn

Discord

Telegram

Ethena''s Potential Outweighs the Risks

Ethena's vision is encapsulated in its endeavour to create 'crypto money'—a financial instrument tailored for the cryptocurrency sector, utilising tools developed within the industry.

The project is entirely focused on crypto, from the collateral assets it supports to its redemption and yield systems, with the objective of offering all users a dollar-denominated means of capital preservation that is scalable, stable, and resistant to censorship.

However, it is crucial for users to comprehend the risks associated with such systems.

Conducting thorough research before investing in or interacting with any protocol is always advisable.

As a recently launched protocol, Ethena has yet to undergo rigorous testing, and some of its mechanisms may introduce unforeseen risks.

One of the most discussed concerns pertains to the protocol's behavior during extended periods of negative funding rates.

There is a theoretical scenario where negative perpetual swap funding rates could lead to USDe deviating from its peg to the downside.

In such an event, the ReserveFund would be activated as an additional safety net for USDe, providing capital to cover negative funding periods and acting as a final buyer in open markets.

This fund is composed of uncorrelated collateral, such as stablecoins (USDC, USDT), smaller allocations of stETH, and liquidity provider positions in USDe and USD.

Its capitalisation stems from a portion of the yield generated by the protocol's asset backing, investor funds, and a long-term fee on the yield produced.

In addition, Ethena is exposed to counterparty risk from centralised derivative exchanges where it maintains short perpetual positions.

Should these exchanges fail to honor payouts or return collateral, Ethena could incur capital losses.

There is also the remote possibility of liquidation if the value of staked ETH collateral diverges significantly from the value of the short derivatives positions.

Furthermore, the use of Liquid Staking Tokens (LSTs) as collateral carries risks related to liquidity and potential loss of confidence in LSTs due to smart contract or protocol vulnerabilities.

Any downturn affecting Lido could impact stETH, thereby reducing its value.

Ethena also faces custodial risks, relying on third-party providers for asset custody and managing exposure to CEXs.

The risk of slashing, a penalty for Ethereum node validators and their staked ETH, is another consideration.

Lastly, the circulating supply of USDe is constrained by the total open interest of Ethereum futures and perpetual contracts, limiting Ethena's unrestricted growth potential.

Despite these risks, DeFi users are likely to appreciate Ethena's blend of in-house liquidity staking options and stablecoins.

Consequently, Coinlive believes Ethena is a project worth exploring.

The network has emerged as a formidable player in the market and has experienced significant growth over the past year.