Forward the Original Title：Ethena开启激励，USDe的APY高达27%，空投即将来临？

What is Ethena?

Ethena is a synthetic USD protocol based on Ethereum, providing a crypto-native solution for the currency that doesn’t rely on traditional banking services.

Ethena’s synthetic USD, USDe, achieves the first censorship-resistant, scalable, and stable crypto-native solution by collateralizing Ethereum for Delta hedging.

“Internet Bonds” will combine yield from staked Ethereum with funds and basis from sustainable and futures markets.

Why are stablecoins so important?

All major trading pairs in spot and futures markets, both centralized and decentralized venues, are priced in stablecoins, with over 90% of order trading and over 70% of on-chain settlements priced in stablecoins.

Stablecoins settled on-chain this year exceeded $12 trillion, accounting for over 40% of TVL in DeFi, making them the most used asset in decentralized currency markets to date.

Global asset management company AllianceBernstein predicts that stablecoin market capitalization will reach $3 trillion by 2028, with the current market cap of stablecoins at $138 billion, peaking at $187 billion, indicating a potential 20x growth.

USDe aims to meet this demand through censorship resistance, scalability, and stability (hopefully).

How does Ethena work?

Assuming a user deposits 1 ETH = $3000 worth of stETH and automatically receives approximately $3000 worth of USDe.

Ethena establishes corresponding short perpetual positions on derivative exchanges at approximately the same value.

The received assets are transferred to over-the-counter settlement providers. Supported assets are kept on-chain and off-chain servers to minimize counterparty risk.

Ethena generates two sustainable sources of income from deposited assets. The returns given back to users come from:

Consensus and execution layer rewards from staked Ethereum (annual rate of 3.5%)

Funds and basis from delta-hedged derivative positions (annual rate of 0-20%).

The annual rate is variable and may be negative (detailed explanation below).

More details on earnings:

Given the mismatch between supply and demand in crypto leverage and the presence of positive baseline funding, funds and basis historically have generated positive returns.

If the funding rate remains consistently negative over some time, making it impossible for the staked Ethereum yield to cover the costs of funds and basis, then the Ethena insurance fund will bear the cost.

Users can find historical returns here:

https://ethena-labs.gitbook.io/ethena-labs/solution-overview/yield-explanation/historical-examples

If the protocol incurs losses due to funding or other reasons, they are borne by Ethena’s insurance fund rather than the collateral contracts.

When users mint USDe, Ethena establishes a short position.

When users redeem USDe, Ethena closes the position.

Ethena closes/opens positions across exchanges to realize unrealized gains and losses.

If the value of USDe in external markets is lower than on Ethena (assuming an external market price of $0.95 while the price on Ethena is $1), users can:

Purchase 1x USDe from Curve using USDC.

Exchange the purchased 1x USDe for ETH on Ethena Labs.

Sell the received ETH on Curve for USDC.

Profit.

If the value of USDe in external markets is higher than on Ethena, users can:

Mint USDe using ETH on Ethena Labs.

Sell USDe on the Curve pool for more than $1, exchanging for USDC.

Purchase ETH on Curve using USDC.

Profit.

Ethena’s 5 Risks

1. Funding Risk:

It concerns the possibility of the funding rate remaining negative. Ethena can generate revenue from the funding, but it can also incur losses (= lower protocol revenue). Ethena’s insurance fund operates similarly to the Anchor Protocol’s revenue reserve fund.

1. Liquidation Risk:

Ethena uses collateralized Ethereum assets (such as Lido’s stETH) to secure short ETHUSD and ETHUSDT perpetual positions on CeFi exchanges. Ethena uses assets different from the underlying assets of derivative positions: stETH. The price difference between ETH and stETH must deviate to 65%, but this has never happened before, with the highest historically being 8% (May 2022 LUNA anchor event).

1. Custodial Risk:

Given that Ethena Labs relies on “off-chain settlement” providers to custody protocol-supported assets, it depends on the operational capability of the provider. Ethena’s ability for deposits, withdrawals, and from-exchange delegation. Any unavailability or delay in these functions would hinder trading and the redemption of USDe.

1. Centralized Exchange Risk:

Ethena Labs utilizes derivative positions to offset the delta of digital asset collateral. These derivative positions are traded on CeFi exchanges such as Binance, Bybit, Bitget, Deribit, and Okx. These exchanges carry centralized risks (refer to the FTX event).

1. Collateral Risk:

There may be a loss of confidence in LST due to the discovery of critical smart contract errors in LST. In such cases, users may attempt to liquidate or swap out of LST into alternative collateral as soon as possible. A bank run could lead to long queues of validators exiting protocols like Lido, as well as liquidity drying up in DeFi and CeFi exchanges.

Advantages and Disadvantages of Ethena

Some advantages:

1. The current APR of stablecoins is 27.6%
2. LSD ETH yield + short ETH funding rate = sUSDe yield
3. Airdrop is coming soon (named Ethena Shards), mining will last for 3 months, or when USDe supply reaches 1 billion USD
4. LP provided + LP tokens locked = 20x Shards/day
5. Buy and hold USDe = 5x Shards/day
6. Staking and holding sUSDe = 1x Shards/day
7. TVL is growing rapidly: currently, TVL exceeds US$300 million
8. Ethena has received US$14 million in financing from investors including Binance, Arthur Hayes, Bybit, Mirana Ventures, Lightspeed, Franklin Templeton, and angel investors DCF GOD, Cobie, and Ansem.
9. All stable pool caps are currently full (looking forward to lifting the cap)
10. Lower smart contract risk, but higher centralization risk (funds are on CEX), and works best when users take high leverage (when everyone wants to be long ETH).
11. Users will soon be able to use your sUSDe in DeFi, please refer to the example below from Seraphim (Ethena Labs Growth Director):

Some disadvantages:

Ethena is more or less a basis trading. When yield reverses, the incentive disappears. Currently, the funding rate for ETH is 0.01 - 0.02%, with longs paying shorts. This situation may persist for a long time, especially in a bull market. However, at some point, the yield will reverse. Suddenly, Ethena has to bear this cost. Although there is an insurance fund to temporarily address the issue, with the decrease in sUSDe yields, there is reason to suspect that users may want to exit. But this is not a death spiral, just users may seek profits elsewhere.

Using ETH as collateral provides a safety margin compared to negative rates. This means Ethereum only cares about days when the Ethereum financing ratio is more negative than the Ethereum yield. However, the liquidity of stETH is crucial to maintaining the peg. If there is not enough stETH liquidity, USDe cannot expand to $100 billion.

Compared to negative rates, using stETH as collateral provides a safety margin. However, the liquidity of stETH is critical for targeting. If there is not enough stETH liquidity, USDe cannot expand to $100 billion.

In the situations that users want to exit:

1. Users redeem
2. Payment can be made using the insurance fund. According to Ethena, $20 million from every $1 billion of USDe can withstand almost all pessimistic funding rate predictions.
3. Ethena’s biggest risk may not be a collapse but rather that when users have “trusted” alternatives, no one may be willing to lock funds in non-yielding tokens. (“Trusted” here refers to stablecoins like USDT or USDC—not that they are better, perhaps they have higher risks, but because they have been around longer, they are more trusted.)
4. Counterparty risk from centralized exchanges and smart contracts may be one of the biggest issues. According to @tbr90, the long-term risk is slow bleeding as negative rates inevitably eat away at the insurance fund, then forcing a slow unwind.
5. As Cobie pointed out, users can do this trade themselves.

For example, shorting ETHUSDT and depositing funds every 8 hours, while longing stETH or mETH (to earn higher temporary returns). No need to wait in line for 7 days, and the risk is chosen by oneself.

1. The founders of Ethena also agree with this point but emphasize that “the creation of Ethena is not about sparing users the trouble of executing arbitrage.” They state: “What is exciting is being able to tokenize this asset, give it extremely high liquidity through DeFi and CeFi, and then allow for the creation of new interesting use cases on top of it, mixing different currencies.”
2. As mentioned by @DeFi Made Here in the post: People confuse luna/ust, leverage/Ponzi, and decentralized/centralized stablecoins. Ethena is not like UST, with a stable decentralized algorithm.

Disclaimer：

1. This article is reprinted from [Panews]. Forward the Original Title‘Ethena开启激励，USDe的APY高达27%，空投即将来临？’. All copyrights belong to the original author [ Route 2 FI, crypto researcher]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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