Author: Alex Xu, Research Partner at Mint Ventures

Introduction

Ethena is one of the few phenomenal DeFi projects in this cycle, with its token's circulating market cap once exceeding 2 billion USD (corresponding FDV exceeding 23 billion). However, since entering April this year, its token price has rapidly declined, with Ethena's circulating market value retreating over 80% from its peak, and the token price has fallen as much as 87%.

Since entering September, Ethena has accelerated its collaboration with various projects, expanding the usage scenarios of its stablecoin USDE, and the stablecoin's scale has begun to rebound from the bottom, with its circulating market value rebounding from a low of 400 million USD in September to currently about 1 billion USD.

In the article I published in early July (Altcoins are Falling, It's Time to Refocus on DeFi), I also mentioned Ethena. At that time, the view was:

‘...Ethena's business model (a public fund focused on perpetual contract arbitrage) still has a clear ceiling. The large-scale expansion of its stablecoin (which reached 3.6 billion USD at the time) relies on secondary market users willing to buy their ENA tokens at a high price, providing substantial yield subsidies for USDE. This slightly Ponzi-like design can easily lead to a negative spiral of business and coin price when market sentiment is poor. The key point of Ethena's business transition is that USDE can one day truly become a stablecoin with a large number of 'natural holders', thus completing its transition from a public arbitrage fund to a stablecoin operator.’

Subsequently, the price of ENA continued to decline by 60%. Even now, the price has rebounded nearly twice from the low, but it is still over 30% below the price at that time.

At this moment, the author reassesses Ethena, focusing on the following three questions:

1. Current business level: Ethena's current core business indicators including scale, revenue, total costs, and actual profit levels

2. Future business outlook: The narratives and future development of Ethena are worth looking forward to

3. Valuation level: Is the current price of ENA undervalued?

This article reflects the author's phase of thinking as of publication, which may change in the future, and the views are highly subjective, possibly containing errors in facts, data, and reasoning logic. Criticism and further discussion from peers and readers is welcome, but this article does not constitute any investment advice.

The following is the main text.

1. Business level: Ethena's current core business situation

1.1 Ethena's Business Model

Ethena positions itself as a synthetic dollar project with ‘native yields’, indicating that its track aligns with MakerDAO (now SKY), Frax, crvUSD (Curve's stablecoin), and GHO (Aave's stablecoin) as belonging to the same category — stablecoins.

In the author's view, the business models of stablecoin projects in the crypto space are fundamentally similar:

1. Raise funds, issue debt (stablecoins), expand the project's balance sheet

2. Use the funds raised for financial operations to achieve financial returns

When the returns obtained from project operation funds exceed the comprehensive costs incurred by fundraising and operating the project, the project is profitable.

Taking Tether, the issuer of the centralized stablecoin project — USDT, as an example: Tether raises USD from users, issues debt (USDT) certificates to users, and then invests the raised funds in government bonds, commercial papers, and other interest-bearing assets to gain financial returns. Given USDT's wide usage, its perceived value by users is equivalent to that of the US dollar, yet it can accomplish many things that traditional dollars cannot (such as instantaneous cross-border transfers). Hence, users are willing to provide Tether with USD in exchange for USDT without charge. Moreover, when one wants to redeem USDT from Tether, a redemption fee must also be paid.

As a latecomer stablecoin project, Ethena clearly has a disadvantage in network effects and brand credibility compared to established projects like USDT and DAI. This is specifically reflected in its higher fundraising costs. Users are only willing to provide their assets to Ethena in exchange for USDE when there are higher return expectations. Ethena's approach is to incentivize users by providing project tokens ENA and offering returns from stablecoins (financial income from project operation funds).

1.2 Ethena's core business data

1.2.1 USDE issuance scale and distribution

Data source: https://app.ethena.fi/dashboards/solvency

After the issuance scale of USDE reached a new high of 3.61 billion in early July 2024, its scale has continued to decline, stopping at 2.41 billion in mid-October, and is currently gradually recovering, reaching approximately 2.72 billion as of October 31.

Among the more than 2.72 billion scale, 64% of USDE is in staking, currently corresponding to an APY of 13% (according to official website data).

Data source: https://dune.com/queries/3456058/5807898

It can be seen that most users hold USDE for investment income, with the 13% being the 'risk-free return' for USDE, which is also the financial cost for Ethena to raise user funds.

At the same time, the short-term US Treasury yield at that time was 4.25% (data from October 24), while the deposit rates for USDT on the largest DeFi lending platform Aave were 3.9%, and for USDC, it was 4.64%.

We can see that Ethena is still maintaining a relatively high fundraising cost to expand its fundraising scale.

USDE is issued not only on the Ethereum mainnet but also expanded across multiple L2 and L1 networks. Currently, the scale of USDE issued on other chains is 226 million, accounting for about 8.3% of the total.

Data source: https://dune.com/hashed_official/ethena

Moreover, Bybit, as an investor in Ethena and an important cooperative platform, not only supports USDE as margin for derivative trading but also provides yields of up to 20% for USDE deposited in Bybit (reduced to a maximum of 10% in September). Therefore, Bybit is also one of the largest custodians of USDE, currently holding 263 million USDE (with peaks exceeding 400 million).

Data source: https://dune.com/hashed_official/ethena

1.2.2 Protocol revenue and distribution of underlying assets

Ethena's current protocol income sources are threefold:

1. Returns from staked ETH in the underlying assets;

2. Income generated from derivative hedging arbitrage funding rates and basis income;

3. Investment returns: held in stablecoin form, earning deposit interest or incentive subsidies, for example, earning rewards from Coinbase's loyalty program (cash subsidies for USDC, annualized at about 4.5%) by depositing USDC; and holding sUSDS (formerly sDAI) in Spark, etc.

According to data approved by Ethena's official Token Terminal, Ethena's revenue in the past month has emerged from last month's low, with October protocol revenue at 10.63 million USD, a month-on-month increase of 84.5%.

Data source: Tokenterminal, Ethena protocol revenue and income allocated to USDE (cost of revenue)

Currently, a portion of the protocol income is allocated to USDE stakers, while another part will enter the protocol's reserve fund, used to cover expenditures when funding rates are negative and various risk events.

In the official documentation, it states that ‘the protocol income amount for the reserve fund needs to be decided through governance.’ However, the author did not find any specific proposals regarding the distribution ratio of the reserve fund in the official forum. The changes in specific ratios were only announced in the official blog initially. The actual situation is that the distribution ratio and logic of Ethena's protocol income have undergone multiple adjustments after launch. During the adjustment process, the official initially listens to community opinions, but the specific distribution plan is still subjectively decided by the official and has not gone through a formal governance process.

From the data in Token Terminal shown in the above graph, it can also be seen that the division ratio of Ethena's revenue between USDE staker income (the red bars in the above graph, i.e., cost of revenue) and the reserve has been very volatile.

During the early stages of the project launch, when protocol income was high, most of it was allocated to the reserve fund, with 86.7% of the protocol income for the week of March 11 allocated to the reserve fund account. However, after entering April, as ENA's price began to plummet rapidly, the income from the ENA token was insufficient to stimulate demand for USDE. To stabilize USDE's scale, the allocation of Ethena's protocol income started to tilt towards USDE stakers, with most of the income distributed to USDE staked users. It was only in the last two weeks that Ethena's weekly protocol income began to significantly exceed the expenses allocated to USDE stakers (this does not account for ENA token incentives).

Ethena's underlying asset situation, data source: https://app.ethena.fi/dashboards/transparency

From the current underlying assets of Ethena, 52% are BTC arbitrage positions, 21% are ETH arbitrage positions, 11% are ETH staking asset arbitrage positions, and the remaining 16% are stablecoins. Thus, Ethena's main income source currently is BTC-based arbitrage positions, with the previously emphasized ETH Staking income contributing a very small income share due to its low asset proportion.

BTC and ETH perpetual contract arbitrage quarterly average yields, data source: https://app.ethena.fi/dashboards/hedging

From the perspective of the average yield trend of BTC's perpetual contract arbitrage, the average yield for the fourth quarter has left the low range of the third quarter and returned to the level of the second quarter of this year. So far, the average annualized yield this quarter is over 8%, but even in the poorly performing third quarter, the overall average annualized yield for BTC arbitrage was also over 5%.

The annualized yield of ETH's perpetual contract arbitrage is also similar to BTC, and it has now returned to a position of over 8%.

Let's take a look at the market contract scale of Sol, which is about to be included as Ethena's underlying asset. Even though Sol's contract positions have significantly increased this year with the rise in prices, currently reaching 3.4 billion USD, there is still a large gap compared to ETH's 14 billion USD and BTC's 43 billion USD (CME data not included).

Sol's contract position trend, data source: Coinglass

The funding cost for Sol, from the largest positions on Binance and Bybit, has been similar to BTC and ETH in recent days, with the annualized funding rate currently around 11%.

Current annualized funding rates for mainstream coins
Data source: https://www.coinglass.com/zh/FundingRate

In other words, even if Sol is later included as an arbitrage target in Ethena's contracts, its scale and yield do not have a significant advantage over BTC and ETH, and it cannot bring much incremental income in the short term.

1.2.3 Ethena's protocol expenditures and profit levels

Ethena's protocol expenditures are divided into two categories:

1. Financial expenses, paid with USDE, directed at USDE stakers, with income sourced from Ethena's protocol revenue (derivative arbitrage and ETH staking, as well as stablecoin investments).

2. Marketing expenses, paid with ENA tokens, directed at users participating in various growth activities (Campaign) of Ethena. These users earn points through participation (different phases of Campaign have different point names, such as Shards in the early stage, later called Sats), and after each quarter's activities, they can exchange their points for corresponding ENA token rewards.

Financial expenditures are relatively easy to understand. For users staking USDE, they have clear income expectations. The official site clearly states the current yield for USDE:

Current yield for USDE staking is 13%, source: https://ethena.fi/

Complicating matters is Ethena's ongoing series of diverse marketing campaigns that began after the project's launch. These campaigns have different rules, along with specific behaviors incentivized by points and a weighting mechanism, involving comprehensive calculations of activities across multiple cooperative platforms.

Let's briefly review the series of growth activities that occurred after Ethena's launch:

1. Ethena Shard Campaign: Epoch 1-2 (Season 1)

Time: 2024.2.19-4.1 (less than a month and a half)

Main incentive actions: provide stablecoin liquidity for USDE on Curve.

Secondary incentive actions: minting USDE, holding sUSDE, depositing USDE and sUSDE into Pendle, holding USDE on various cooperative L2s.

Scale growth: During this period, the scale of USDE increased from less than 300 million to 1.3 billion.

The number of ENA issued, i.e., the marketing expenditure for activities: a total of 750 million, accounting for 5%. Among them, the top 2000 wallets that received the most airdrops can instantly claim 50%, while the remaining 50% will be linearly distributed over the next 6 months. The other small wallets have no unlocking restrictions. According to the Dune dashboard data created by @sankin, nearly 500 million ENA has been claimed between June, with the highest price of ENA before June being about $1.5 and the lowest about $0.67, taking an average price of about $1; after early June, ENA started to drop rapidly from $1, reaching a low of around $0.2, with the average price around $0.6, with the remaining 250 million ENA mostly claimed during this period.

We can roughly estimate that the corresponding value of 750 million ENA is 5*1 + 2.5*0.6, roughly 650 million USD.

In other words, the scale of USDE has grown by about 1 billion USD in less than two months, corresponding marketing expenses have reached 650 million USD, which does not yet include the financial expenses paid for USDE.

Of course, as ENA's first airdrop, this stage's massive marketing expenses have a special significance.

2. Ethena Sats Campaign: Season 2

Time: 2024.4.2-9.2 (5 months)

Main incentive actions: Locking ENA, providing liquidity for USDE, using USDE as collateral for lending, depositing USDE into Pendle, depositing USDE into Restaking protocols, depositing USDE into Bybit.

Secondary incentive actions: Locking USDE on official platforms, holding and using USDE on cooperative L2s, using sUSDE as collateral for lending, etc.

Scale growth: During this period, USDE's scale increased from 1.3 billion to 2.8 billion.

The number of ENA issued, i.e., the marketing expenditure for activities: like the first quarter, the second quarter rewards are also 5% of the total, i.e., 750 million ENA (among which the 2000 wallets receiving the most airdrops also face 50% TGE and a subsequent unlocking period lasting 6 months). Based on ENA's current price of $0.35, the corresponding value of 750 million ENA is approximately 260 million USD.

3. Ethena Sats Campaign: Season 3

Time: 2024.9.2 to 2025.3.23 (less than 7 months)

Main incentive actions: Locking ENA, holding USDE in designated cooperative protocols (mainly DEX and lending), depositing USDE in Pendle.

Scale growth: As of now, despite the plans for the third quarter, the scale growth of USDE has encountered a bottleneck. Currently, the scale of USDE is about 2.7 billion, which is still down from 2.8 billion on the start date of the third quarter.

ENA issued: Considering that the third quarter's duration is close to 7 months, longer than the second quarter, and the ENA reward incentives are likely to continue to decrease, the total incentive amount for ENA in the third quarter is likely to remain at 5% of the total, i.e., 750 million.

Thus, we can perform a rough calculation of the total protocol expenditures of Ethena since its launch this year up to now (October 31):

Financial expenditure (paid to USDE stakers in stablecoin form): 8.1647 million USD

Marketing expenses (paid to participating users in ENA tokens): 650+260=910 million USD (this does not account for potential expenses after September)

Trends in Ethena's quarterly protocol revenue and financial expenditures, source: tokenterminal

While the total protocol income during the same period was 124 million USD

In other words, contrary to the impression that ‘Ethena is very profitable,’ in reality, Ethena's income, after deducting financial and marketing expenses, has accumulated a net loss of 868 million USD by the end of October this year. The author has not yet considered the ENA token expenditures in September and October, so the actual loss amount may be even higher.

8.68 million USD net loss, this is the price of reaching a market cap of 2.7 billion USD for USDE in one year.

In fact, like many DeFi projects in the previous cycle, Ethena's approach is to boost core business metrics and increase protocol revenue through token subsidies. However, Ethena has adopted a unique points system in this round, delaying the issuance of tokens and incorporating more partners as participation channels, making it difficult for participating users to intuitively assess the final financial returns of their participation in Ethena's activities, which in a sense enhances user stickiness.

2. Future business outlook: The narratives and future development of Ethena are worth looking forward to

In the past two months, ENA achieved nearly a 100% rebound from its low, even under the condition that ENA opened the rewards for Season 2 at the beginning of October. These two months have also been dense with Ethena news and positive developments, such as:

October 28: On-chain options and perpetual contract project Derive (formerly Lyra) included sUSDE as collateral.

October 25: USDE was included as collateral for OTC trading by Wintermute.

October 17: Ethena initiated a proposal to ‘integrate Ethena's liquidity and hedging engine into Hyperliquid’

October 14: The Ethena community initiated a proposal to include SOL as an underlying asset for USDE.

September 30: The first project of the Ethena ecosystem network debuted, the derivative trading platform Ethereal, which promised to airdrop 15% of tokens to ENA users. Subsequently, Ethena Network announced that it would release more information about product launch timelines and new ecosystem applications based on USDE in the coming weeks.

September 26: Planning to launch USTB — the so-called ‘new stablecoin launched in cooperation with BlackRock.’ In fact, USTB is a stablecoin backed by the on-chain government bond token BUILD issued by BlackRock, with limited direct relationship with BlackRock.

September 4: In collaboration with Etherfi and Eigenlayer, launched the first stablecoin AVS collateral asset — eUSD, which can be obtained by depositing USDE into etherfi. eUSD went live on September 25.

It can be said that in the past two months, the scenarios for USDE and sUSDE have increased significantly, although the demand stimulation for USDE may not be obvious. For example, the stablecoin AVS collateralized by assets eUSD, launched in cooperation with Etherfi and Eigenlayer, currently has a scale of just a few million.

In fact, what really drove this round of ENA price surge is the well-known trader and crypto KOL Eugene @0xENAS's strong endorsement article about Ethena published on October 12 (Ethena: The Trillion Dollar Crypto Opportunity).

This article, which has nearly 400 shares, over 1800 likes, and over 700,000 views, caused ENA's price to rise from $0.27 to $0.41 in four days, an increase of over 50%.

In the article, Eugene reviewed some of Ethena's product features and emphasized three reasons. However, in the author's view, except for the first reason, the remaining two reasons are full of criticisms:

1. The US interest rate cuts have led to a decline in global risk-free rates, making USDE's APY appear more attractive, resulting in more capital inflows.

2. The newly launched USTB stablecoin ‘in cooperation with BlackRock’ is an ‘absolute gamechanger’, which will greatly enhance the adoption of USDE, as USDE can switch its underlying assets to USTB to obtain risk-free returns from government bonds when the market's perpetual arbitrage yields are negative.

Points of Concern: USTB, backed by BUILD, does not equate to USTB being a stablecoin jointly launched by BlackRock and Ethena, just as Dai's underlying assets contain a large amount of USDC, but Dai is not a stablecoin jointly launched by Circle and MakerDAO. In reality, USDE can obtain government bond yields during periods of negative perpetual yields simply by closing positions and allocating to Build or sDAI, or by converting to USDC and depositing it in Coinbase to earn a 4.5% annualized subsidy, without needing to issue another USTB to hold. USTB seems more like a gimmicky product leveraging BlackRock's traffic, and calling such a mediocre product an ‘absolute gamechanger’ raises doubts about the author's understanding or writing motives.

3. Future ENA emission rates will decrease, and the rapid selling pressure compared to before will diminish.

Points of Concern: The actual rewards for Season 2 still have a total ENA cap of 5%, meaning that 750 million tokens of incentives will enter circulation over the next 6 months, which is not much less than the total incentive amount from the previous season. Moreover, in March next year, ENA will face a massive unlocking for the team and investors, and the inflation expectations for ENA over the next six months do not seem optimistic.

However, there are still stories to look forward to in Ethena over the next few months to a year.

Firstly, as the expectations of Trump's ascent and the Republican victory rise (results can be seen within days), the warming crypto market benefits the perpetual arbitrage yields and scales of BTC and ETH, increasing Ethena's protocol revenue;

Secondly, more projects are expected to emerge in the Ethena ecosystem after the introduction of Ethereal, increasing ENA's airdrop income.

Thirdly, Ethena's self-operated public chain launch can also bring attention and nominal scenarios such as staking for ENA, but the author predicts this will be launched only after more projects have accumulated on the second track.

However, for Ethena, the most important thing is that USDE can be accepted by more top CEXs as collateral and trading assets.

Bybit has already established deep cooperation with Ethena among leading exchanges.

Coinbase has its own USDC to operate, and given the complexities of regulation as a US-based company, its likelihood of supporting USDE as collateral and stablecoin trading pairs is virtually zero.

Among the two major CEXs, there is a possibility that OKX will include USDE in stablecoin trading pairs and contract collateral, as it participated in two rounds of financing for Ethena, aligning financial interests to some extent. However, this possibility is not large, as this move would also pose operational and endorsement risks related to Ethena for OKX. Compared to OKX, Binance, which only participated in one round of Ethena investment, has an even lower possibility of including USDE in stablecoin trading pairs and collateral, and Binance also has its own supported stablecoin project.

It is believed that USDE will become collateral for contracts at major exchanges, which is also one of the reasons Eugene was optimistic about Ethena in his previous article. However, the author is not very optimistic about this.

3. Valuation level: Is the current price of ENA undervalued?

We analyze ENA's current valuation situation from both qualitative analysis and quantitative comparison.

3.1 Qualitative Analysis

In the coming months, events favorable to the ENA token price with a high probability of occurring include:

  • The increase in arbitrage income brought by the recovery of the crypto market reflects an improvement in expected protocol income, causing ENA prices to rise and promoting the growth of USDE's scale.

  • Including SOL as an underlying asset can attract the attention of SOL ecosystem investors and project parties.

  • In the coming months, more projects similar to Ethereal may emerge in the Ethena ecosystem, bringing more airdrops to ENA.

  • Before the next wave of large ENA unlocks, the project party has motives to lift the coin price: firstly, to promote an upward spiral in business and coin price; secondly, to provide themselves with a higher exit price.

In addition, based on Ethena's performance since launching over six months ago, the Ethena project team's business capabilities are very strong. It can be said that Ethena is currently one of the most aggressive and efficient among many stablecoin projects in external cooperation and expansion, more so than the leading stablecoin project MakerDAO.

Currently, factors that are unfavorable to the value of ENA tokens and suppress ENA prices include:

  • ENA lacks real monetary yield distribution, and is more about relatively abstract staking scenarios (such as securing Ethena's multi-chain safety as AVS assets) and self-mining.

  • The actual profitability of the Ethena project is poor, and the massive subsidies implemented to open the market have led to serious net losses for the project, which are essentially borne by ENA token holders.

  • ENA still faces significant inflationary pressure in the next six months, partly from ENA token expenditures in marketing activities, and in late March next year, it will face the unlocking of the core team and investors after a year. According to tokenomist data, ENA tokens will face inflation pressure of 85.4% of the current circulating supply over the next six months.

Data source: https://tokenomist.ai/

3.2 Quantitative Comparison

Ethena's business model is essentially similar to other stablecoin projects, with its innovation lying in the use of raised assets, specifically profiting by leveraging raised assets through perpetual contract arbitrage.

Therefore, we will use MakerDAO (now SKY), the most valuable stablecoin project in circulation, as a benchmark for valuation comparison.

It can be seen that, compared to the established protocol MakerDAO, Ethena's token ENA does not currently offer cost-effectiveness in terms of protocol revenue or profit.

Summary

Although many people refer to Ethena as a highly representative innovative project in this cycle, its core business model is no different from other stablecoin projects, both of which involve raising funds for financial operations to profit, while striving to promote the use scenarios and acceptance of their bonds (stablecoins) to minimize their fundraising costs.

From the current stage, Ethena, which is in the early promotion phase of stablecoins, is still in a huge loss stage, and it is not as many KOLs say it is a ‘very profitable project’. Its valuation is not underestimated compared to the stablecoin representative project MakerDAO.

However, as a new player in this field, Ethena has demonstrated very strong business development capabilities, being more aggressive than other projects. Like many DeFi projects in the previous cycle, rapid scale expansion and more project adoptions will enhance investors and researchers' optimistic expectations for the project, thereby boosting the coin price, which in turn will lead to higher APY, further increasing the scale of USDE, forming a self-reinforcing upward spiral.

Then, these types of projects will eventually face a critical point, where people begin to realize that the growth of the project is facilitated by token subsidies, and the price increase of the newly issued tokens seems to be supported only by optimistic sentiment, lacking a value link.

Thus, a fast-paced game has begun.

Ultimately, only a few projects can rise from such a downward spiral. The previous cycle's stablecoin star Luna (UST issuer) has already been buried, Frax's business has shrunk significantly, and Fei has ceased operations.

As a product with a significant Lindy effect (the longer it exists, the stronger its vitality), Ethena and its USDE still need more time to validate the stability of its product architecture and its survival capability after subsidy reductions.

Reference materials and data sources

Asset prices: https://www.coingecko.com/

Token unlock information: https://tokenomist.ai/

Financial data: https://tokenterminal.com/

Project data dashboard: https://app.ethena.fi/dashboards/transparency

Official announcement: https://mirror.xyz/0xF99d0E4E3435cc9C9868D1C6274DfaB3e2721341

KOL Eugene's post: https://x.com/0xENAS/status/1844756962854212024