Charles Edwards, the founding father of Capriole Investments, has sparked vital curiosity and debate inside the cryptocurrency group. 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 primarily based 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 shouldn’t be 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 primarily based on market forces. Two issues Luna wasn’t. At it is peak LUNA was over 20X larger than what ENA is now. ENA shouldn’t be danger free, custody…
— Charles Edwards (@caprioleio) April 10, 2024
Since its launch on April 2, ENA has seen a meteoric rise from below $0.30 to a excessive of $1.45. This rally is essentially attributed to Ethena Labs’ strategic enhancement of its rewards program, now in its “Season 2,” which presents a 50% reward enhance for customers locking their ENA tokens for a minimum of seven days. This transfer goals to bolster consumer engagement and loyalty, fostering a sustainable ecosystem for the Ethena platform.
A outstanding side of this ecosystem is the speedy progress of its stablecoin, USDe, which has outstripped the availability progress of established counterparts equivalent to USDT, USDC, and DAI, reaching a $2 billion provide in simply over 100 days.
USDe is the quickest rising USD denominated asset within the historical past of crypto pic.twitter.com/xgiRJjf96t
— G | Ethena (@leptokurtic_) April 8, 2024
Nonetheless, the undertaking’s excessive yields that are generated by harnessing the by-product markets and staked Ethereum have stirred skepticism amongst trade specialists. Fantom founder Andre Cronje, amongst others, has raised issues concerning the sustainability of those yields, that are the best in the whole crypto trade.
Dangers Concerned With Ethena
Diving deeper into the dialogue of dangers, CL (@CL207) from eGirl Capital presents an intriguing perspective on the habits of derivatives merchants. She clarifies, “It seems Ethena is making many individuals who don’t commerce derivatives have a very exhausting time wrapping their heads round the truth that derivatives merchants are so genuinely retarded that we’re prepared to pay like 50%+ APR to enter a place.”
Notably, final cycle crypto merchants have been bidding futures so excessive that Bitcoin quarterlies earned “a locked-in >50% apr. She added, “simply 50 days into 2021, we collectively paid 2,400,000,000$ in funding charges by the top of 2021, the market has paid as a lot as a decently sized nation’s GDP.”
Monetsupply.eth (@MonetSupply) from Block Analitica offers a granular evaluation of the dangers Andre Cronje highlighted. By his examination, a number of key areas of concern are outlined:
- Oracle Threat: The potential influence on alternate positions resulting from Ethena offering inaccurate quotes on minting or redeeming operations. Nonetheless, MonetSupply notes, “there’s price limits on this tho so max loss is constrained and counterparties are all whitelisted (can’t simply run away with the cash).”
- Liquidation Threat: Deemed not a major issue because the portfolio is leveraged lower than 1x, suggesting a conservative strategy to borrowing and leverage.
- Unfold Threat: The opportunity of elevated foundation resulting in greater funding income, which ought to theoretically entice inflows. Conversely, a unfavorable foundation may trigger outflows, however Ethena may benefit from closing hedged positions profitably.
- Collateral Ratio Threat: 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 Threat: Highlighted as one of many extra vital issues, given the reliance on custodians with observe report and the distribution of property throughout a number of entities.
- Change Solvency Threat: This danger might 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 may change this evaluation although, are they really unbiased?”
- Ethena Entity Threat: The interior danger associated to Ethena’s keys or authentication tokens being compromised, or a group member appearing 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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