May 11, 2024

🥛 Ethena: pioneering innovation or just hype?

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This week, we're highlighting Ethena, the new synthetic-dollar protocol that has been turning heads over the past few weeks.

Ethena is blazing through records, pulling in over $2 billion in total value locked (TVL) in under 7 weeks since its February debut. 

This rapid growth makes it the fastest-growing stablecoin in history 🤯.

Ethena is offering yields upwards of 30% APY on its stablecoin, USDe, and has also recently launched its token, $ENA, which is valued at over $12 billion as of this writing.

Impressive growth, right? But we've seen this pattern before: huge hype, rapid TVL growth, and Twitter buzzing about it, only for it to start fading away. 

Is it the same for Ethena? Can it sustain this explosive growth and valuation? 

And what about these industry-leading yields—it’s reminiscent of the situation with Terra Luna 🫤. Can Ethena avoid a similar fate?

To answer all of these questions, in today’s report, we’ll dive into:

  • What exactly is Ethena? 🤔

  • How does Ethena manage to generate such high yields? 💸

  • How is this yield distributed? 🔄

  • How big is Ethena’s market opportunity? 🚀

  • How does Ethena's valuation compare to other protocols? 📊

  • What risks should we watch out for with Ethena? ⚠️

  • And 4 ways to capitalize on Ethena’s growth 👀

But first… Let's establish the context for stablecoins – the market in which Ethena operates.

The stablecoin market is currently valued at $160 billion. Quite impressive, huh? 

But despite this, the existing stablecoins have their own challenges and don't provide the ideal solution.

Some stablecoins are centralized, non-transparent, and subject to censorship, while others are decentralized but not scalable. Ethena solves all that.

Before we dive into those major challenges, let's take a quick look at the distribution of this market.

The stablecoin market is dominated by USDT and USDC, which hold 68% and 20% of the market, respectively. 

These stablecoins are backed by actual dollars, so each USDT or USDC corresponds to one USD in the bank. 

They are managed by central authorities (Tether & Circle), which means they are:

  • Centralized

  • Non-transparent

  • Can be censored

  • Require a lot of trust

Something we don't really like in crypto. 🤢

These organizations also make money by investing these dollars in U.S. treasury bills (short-term bonds) that currently yield about 5%. 

However, this profit isn't passed on to the users of these stablecoins. 

There are ways to access these yields:

  • USDC can be staked on Coinbase 

  • USDT can be staked on Tron blockchain 

But it forces users to use Coinbase or bridge the money to the Tron blockchain, which might not be that known to the majority of people. Therefore those are not ideal solutions.  

Also, if these yields drop, these organizations will have limited alternatives for investing these dollars. 

Good luck to them when central banks decide to lower the rates. 😬

Now, let's talk about DAI — the third-largest stablecoin, with 3% of the market. 

What sets DAI apart is its decentralization and the management by MakerDAO (learn more about MakerDAO in a recent report here).

This setup allows them to invest in both U.S. treasury bills and onchain, offering a notable advantage.

Yet, they'll still need to find optimal strategies for generating some juicy yield – is this where Ethena comes in? We’ll see in this report. 

For now, we've quickly covered the stablecoin market and its 3 biggest players, which hold about 93% of the total market share.

Let's now examine the features that would define the ideal stablecoin:

  • Decentralized, not controlled by any central authority, and does not require much trust 

  • Liquid and stable, meaning you can easily buy or sell any amount at the expected price of $1 or above if it accrues yield 

  • Offers easy access to a significant yield, possibly between 10% and 30%

  • Composable, meaning you can use it in various decentralized finance (DeFi) applications 

Does Ethena tick all of these boxes? Let’s explore. 👇


Imagine you've developed a robust trading strategy that earns high yields – let's say 20% – and is unaffected by price changes, meaning that the strategy works well regardless of whether crypto prices go up or down.

In this scenario, if someone gives you $100, you'll be able to return the $100 at any time, plus some extra profit that you generated using your strategy. 

That's great. You have a great strategy that maintains the stable value of the initial investment ($100) and generates additional yield on top of it. 

So you start wondering: how can I gather as much capital as possible to deploy in my strategy?

Well, what if you create a stablecoin that represents the capital used in this strategy, where the value of the capital remains stable and simply accrues yield?🤯

That's a great idea, isn't it? That's exactly what Ethena has done. Here’s how it works:

For every dollar in Ethena, there is a corresponding long position (which profits when the price increases) and a simultaneous short position (which profits when the price decreases) for the selected asset (ETH or BTC). 

It is called the delta neutral strategy.

Here’s a breakdown of how Ethena works with just $100 in the system:

1/ Deposit: A user puts in $100.

2/ Conversion: The money is converted into underlying collateral assets like $ETH or $stETH.

3/ Leverage: These assets are then leveraged to open a short position on derivatives exchanges.

4/ Mint: The user gets 100 USDe, a stablecoin backed by both a long and a short position to maintain the value of the $100

That’s how Ethena works.. 

But here's the main question…


Ethena generates high yields through two main sources:

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  • How big is Ethena’s market opportunity?

  • How does Ethena's valuation compare to other protocols?

  • 4 ways to capitalize on Ethena’s growth

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