Given the startlingly high returns and large investments in Ethena, some investors should exercise caution, bearing in mind the fall of Terra.
HISTORICAL POINTS
- Massive investments are drawn to Ethena due to its 37% staking return.
- This enormous staking yield raises doubts about Ethena's long-term viability despite positive performance.
- Will Ethena's bubble burst like Teera's, or will it establish new standards?
Synthetic dollar protocol built on Ethereum Recently, Ethena has made headlines because to its native token, ENA, which has gained an astounding 100% since its introduction in early April 2024. Massive investments are being drawn to Ethena, which mimics a typical hedge-fund deal, amidst the market's general excitement. But Ethena's staking yields have increased to an astounding 37%, prompting concerns about the company's sustainability rate.
Ethena and Its USDe Cryptocurrency
Using a cryptocurrency approach similar to the basis trade and its artificial dollar USDe token, Ethena accomplishes its goal by taking advantage of price differences between spot and futures markets. This tactic, referred to as a cash-and-carry trade in the cryptocurrency world, has shown to be quite profitable lately despite rising financing rates and token values.
This is the working mechanism: Traders deposit stETH, an Ether derivative, together with other authorized tokens to create USDe tokens through an automated process. The company that created USDe, Ethena Labs, then opens short bets using Ether futures and perpetual swaps, which are a particular kind of cryptocurrency futures contract that never closes. These short positions are set up on several cryptocurrency exchanges, such as Binance.
Holders of sUSDe, a USDe derivative locked within the project, can profit from very high funding rates thanks to these short positions. These rates have exceeded 100% annually on an annualized basis throughout this year's bull market.
Controlling the Risk-Reward
Naturally, there are certain increased hazards associated with Ethena's astoundingly high yields. The enormous payouts on the TerraUSD coin, however, turned out to be too good to be true when considering the collapse of the Terra ecosystem.
It's clear that Ethena differs from TerraUSD in terms of design, but investors find it difficult to pinpoint the potential problems with the asset class. Robot Ventures' partner Robert Leshner, a financial entrepreneur, stated:
In essence, it's a tokenized hedge fund that oversees a very intricate trading strategy on several exchange platforms. The worst-case scenario is that, for any number of reasons, the hedge fund performs below the predicted funding rate on each of these several cryptocurrency exchanges.
With the previously discussed USDe token system in place, Ethena is working to create a centralized cryptocurrency that offers competitive yields and stable value at the same time. The primary source of support for the DeFi market is centralized stablecoins like USDT and USDC. Unlike these tokens that are backed by real assets, the primary source of support for USDe is stETH.
One thing to be concerned about is that Ethena's record has only shown the strategy's efficacy in a bull market.
On its website, Ethena lists several hazards connected to USDe. Among these is funding risk, which refers to possible losses if financing rates decline over a protracted period. In light of the uncertainty surrounding the post-FTX cryptocurrency market, exchange risk is also emphasized.
Custodial risk is also discussed because the initiative relies on outside partners to protect clients' assets. Another consideration is collateral risk, as Ethena uses stETH as security for its holdings in derivatives. There can be problems if the price of stETH falls dramatically in comparison to Ether. In the cryptocurrency markets this year, ether has had a comeback, rising by almost 50% so far in 2024.