Charles Edwards, the founding father of Capriole Investments, has sparked vital curiosity and debate inside the cryptocurrency neighborhood. He heralded Ethena (ENA) as “the Luna of this cycle,” however with a vital distinction: its financial fundamentals are deemed sustainable.
Edwards elaborated, “It’s 100% collateralized and the yield is variable based mostly on market forces. Two issues Luna wasn’t.” He additionally famous that at its zenith, Luna’s valuation exceeded ENA’s present market cap by greater than twenty-fold, but he cautioned, “ENA just isn’t risk-free, custody and execution danger exist.”
Ethena is the Luna of this cycle, besides the underlying economics are literally sustainable. It is 100% collateralized and the yield is variable based mostly on market forces. Two issues Luna wasn’t. At it is peak LUNA was over 20X larger than what ENA is now. ENA just isn’t danger free, custody…
— Charles Edwards (@caprioleio) April 10, 2024
Since its launch on April 2, ENA has seen a meteoric rise from underneath $0.30 to a excessive of $1.45. This rally is basically attributed to Ethena Labs’ strategic enhancement of its rewards program, now in its “Season 2,” which provides a 50% reward increase for customers locking their ENA tokens for not less than seven days. This transfer goals to bolster person engagement and loyalty, fostering a sustainable ecosystem for the Ethena platform.
A exceptional facet of this ecosystem is the speedy progress of its stablecoin, USDe, which has outstripped the availability progress of established counterparts corresponding to USDT, USDC, and DAI, reaching a $2 billion provide in simply over 100 days.
USDe is the quickest rising USD denominated asset within the historical past of crypto pic.twitter.com/xgiRJjf96t
— G | Ethena (@leptokurtic_) April 8, 2024
Nonetheless, the mission’s excessive yields that are generated by harnessing the by-product markets and staked Ethereum have stirred skepticism amongst business specialists. Fantom founder Andre Cronje, amongst others, has raised issues in regards to the sustainability of those yields, that are the best in all the crypto business.
Dangers Concerned With Ethena
Noteworthy, ENA is usually in comparison with Terra Luna (LUNA), however the variations couldn’t be a lot larger, as Edwards additionally famous. Whereas ENA just isn’t danger free, a demise just like the one among LUNA is extremely unlikely. Regardless of that, buyers want to pay attention to different dangers concerned with ENA.
Diving deeper into the dialogue of dangers, CL (@CL207) from eGirl Capital provides an intriguing perspective on the conduct of derivatives merchants. She clarifies, “It seems Ethena is making many individuals who don’t commerce derivatives have a extremely laborious time wrapping their heads round the truth that derivatives merchants are so genuinely retarded that we’re keen to pay like 50%+ APR to enter a place.”
Notably, final cycle crypto merchants had been bidding futures so excessive that Bitcoin quarterlies earned “a locked-in >50% apr. She added, “simply 50 days into 2021, we collectively paid 2,400,000,000$ in funding charges by the tip of 2021, the market has paid as a lot as a decently sized nation’s GDP.”
Monetsupply.eth (@MonetSupply) from Block Analitica gives a granular evaluation of the dangers Andre Cronje highlighted. By his examination, a number of key areas of concern are outlined:
- Oracle Danger: The potential affect on alternate positions attributable to Ethena offering inaccurate quotes on minting or redeeming operations. Nonetheless, MonetSupply notes, “there’s fee limits on this tho so max loss is constrained and counterparties are all whitelisted (can’t simply run away with the cash).”
- Liquidation Danger: Deemed not a big issue because the portfolio is leveraged lower than 1x, suggesting a conservative strategy to borrowing and leverage.
- Unfold Danger: The potential of elevated foundation resulting in increased funding income, which ought to theoretically entice inflows. Conversely, a unfavourable foundation would possibly trigger outflows, however Ethena may benefit from closing hedged positions profitably.
- Collateral Ratio Danger: Despite the fact that liquid staking tokens (LSTs) are given lower than 100% weight on centralized exchanges (CEX), the general low leverage mitigates this danger. The proportion of LST in spot collateral is comparatively minor.
- Custody Danger: Highlighted as one of many extra vital issues, given the reliance on custodians with observe file and the distribution of belongings throughout a number of entities.
- Alternate Solvency Danger: This danger may result in the lack of unsettled revenue and loss (PnL) and a few buying and selling prices to rehedge on different exchanges. Nonetheless, MonetSupply provides, “the Binance/ceffu nexus would possibly change this evaluation although, are they really unbiased?”
- Ethena Entity Danger: The interior danger associated to Ethena’s keys or authentication tokens being compromised, or a workforce member performing maliciously.
MonetSupply concludes that regardless of these dangers, the framework of overcollateralization on platforms like Morpho, the Maker surplus buffer, and the MKR backstop, supported by a considerable Proof of Liquidity (POL), serves as a sturdy mitigating issue.
At press time, ENA traded at $1.329.
Featured picture from Bitget, chart from TradingView.com
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