Ethena: A "Stablecoin" with a 27% APY Promise ๐
Stablecoins are the backbone of the crypto economy, USDC alone settled over $7 trillions in on-chain transactions in 2023. With major financial analysts predicting the market cap of stablecoins to reach $3T by 2028, the importance of scalable, stable, and "decentralized" options cannot be overstated.
๐ฐ Show me the money!
If you don't know where the yield comes from, you are the yield, so, how is Ethena able to offer so much yield?๐ค
First of all, it is not a stablecoin per se (uh?!๐คฏ). It is a trade position that is tokenized in the form of a stablecoin. How does it work?๐ ๏ธ
1. Stake $ETH on @LidoFinance; 2. $stETH provides you yield; 3. $stETH gets margin on a third-party platform; 4. The margin is used to short $ETH on CEXes; 5. Funding gives you yield if positive (on average it is positive, more on this later); 6. The position is represented as a ERC20 stablecoin called $USDe
By the way, this was tried before in an even more decentralized manner (UXD) but the DeFi infra was not ready.๐๏ธ
๐จ Main Risks (Is this another LUNA/UST?)
1. Funding yield goes negative for longer than expected. This would be absorbed by Ethena insurance fund. Also, opening and closing positions have a cost that can affect PnL.
2. CEX Blow Up๐ฅ: You'd lose 20% of the short leg (but you donโt lose your collateral since itโs segregated) so youโre net long instead of delta neutral. If the market is up then youโre now overcollateralised and if the market is down you'd be undercollateralised.
3. Euphoria: Athena team can start to play with riskier assets as collateral to juice yields and those get a blow๐ช
4. eUSD faces credit risk if a platform fails to honor a short, potentially causing a proportional drop in its value.
5. Counterparty/contract risk.
6. Looped leverage (borrowing eUSD with eUSD) intensifies depegging.
LUNA blew up because of its reflexive design ($LUNA minted and sold, both go to $0 to protect $UST peg); this system was used to subsidize the 20% yield which was unsustainable from the beginning. Ethena is fully collateralized in exchange โ
๐งThe Big Question: Is Ethena Sustainable?
I have my doubts, to be honest, for starts I don't think it should be called "stablecoin", it masks the risks.
Secondly, I am skeptical about using an Insurance fund to absorb (subsidize) the days with negative funding rates. IMO, the negative interest rates should just pass to users (rebase downwards/slash USDe).
Third, the success of Ethena relies on maintaining positive funding rates, which has been the trend. Yet, if Ethena's success grows significantly, it could alter market dynamics, potentially affecting these positive rates. In other words, the historic view is not useful if Ethena is large because the historic view does not have Ethena impacting rates. Simplified:
- More capital looking to long = + funding rate => longs pay shorts. ๐
- More capital looking to short = - funding rate => shorts pay longs.๐