Charles Edwards, the founding father of Capriole Investments, has sparked vital curiosity and debate throughout 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 is just not 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 is just not danger free, custody…
— Charles Edwards (@caprioleio) April 10, 2024
Since its launch on April 2, ENA has seen a meteoric rise from beneath $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 affords a 50% reward enhance for customers locking their ENA tokens for at the very least seven days. This transfer goals to bolster consumer engagement and loyalty, fostering a sustainable ecosystem for the Ethena platform.
A exceptional side of this ecosystem is the fast progress of its stablecoin, USDe, which has outstripped the provision progress of established counterparts comparable to USDT, USDC, and DAI, reaching a $2 billion provide in simply over 100 days.
USDe is the quickest rising USD denominated asset within the historical past of crypto pic.twitter.com/xgiRJjf96t
— G | Ethena (@leptokurtic_) April 8, 2024
Nevertheless, the venture’s excessive yields that are generated by harnessing the by-product markets and staked Ethereum have stirred skepticism amongst business consultants. Fantom founder Andre Cronje, amongst others, has raised issues concerning the sustainability of those yields, that are the best in your complete crypto business.
Dangers Concerned With Ethena
Noteworthy, ENA is usually in comparison with Terra Luna (LUNA), however the variations couldn’t be a lot larger, as Edwards additionally famous. Whereas ENA is just not danger free, a demise just like the certainly one of LUNA is very unlikely. Regardless of that, traders want to concentrate on different dangers concerned with ENA.
Diving deeper into the dialogue of dangers, CL (@CL207) from eGirl Capital affords an intriguing perspective on the conduct of derivatives merchants. She clarifies, “It seems Ethena is making many individuals who don’t commerce derivatives have a extremely exhausting time wrapping their heads round the truth that derivatives merchants are so genuinely retarded that we’re prepared to pay like 50%+ APR to enter a place.”
Notably, final cycle crypto merchants had been bidding futures so excessive that Bitcoin quarterlies earned “a locked-in >50% apr. She added, “simply 50 days into 2021, we collectively paid 2,400,000,000$ 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 offers a granular evaluation of the dangers Andre Cronje highlighted. By means of his examination, a number of key areas of concern are outlined:
- Oracle Threat: The potential impression on alternate positions resulting from Ethena offering inaccurate quotes on minting or redeeming operations. Nevertheless, 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 Threat: Deemed not a big issue because the portfolio is leveraged lower than 1x, suggesting a conservative method to borrowing and leverage.
- Unfold Threat: The opportunity of elevated foundation resulting in greater funding income, which ought to theoretically appeal to inflows. Conversely, a unfavorable foundation would possibly trigger outflows, however Ethena may gain advantage from closing hedged positions profitably.
- Collateral Ratio Threat: Though 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 a very good monitor file and the distribution of property throughout a number of entities.
- Trade Solvency Threat: 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. Nevertheless, MonetSupply provides, “the Binance/ceffu nexus would possibly change this evaluation although, are they really impartial?”
- Ethena Entity Threat: The interior danger associated to Ethena’s keys or authentication tokens being compromised, or a staff 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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