Summary of general review of Ethena by Arthur Hayes and Jaypeg

These are both extremely good people in crypto.

Ethena is a protocol that the DCCK team recently introduced its potential as well as guided farmers to receive airdrops from it.

overview

  • Ethena is the protocol that creates USDe, a synthetically backed stablecoin

    • It is pegged by spot ETH positions and short ETH perp with the same volume

  • Tether has shown that stablecoins are a good fit for the crypto market, and Ethena is capitalizing on this opportunity based on Ethereum.

  • Ethena will solve 2 problems of Tether

    • USDe holders can stake directly and earn a lot of interest

    • Incentive programs are perfectly arranged

      • Many exchanges also invested in Ethena from early funding rounds

      • The protocol's governance token is coming soon so users can benefit from Ethena

  • USDe has such a high yield, why isn't it trading at a higher level than other stablecoins?

    • This could put selling pressure on USDe

Ethena and Luna?

  • UST is backed by LUNA and BTC

  • USDe back in staked ETH + equivalent short positions (nothing to do with Ethena governance tokens)

  • ETH is heavily deflationary and USD is inflating

    • Over the long term, funding on ETH futures will generally be positive (benefiting the protocol's ETH shorts)

  • UST and USDe are very, very different

Risks and limitations

  • Risk comes from the trading floor and partners

    • Ethena is not decentralized and it is trying not to be

    • If the floors have problems then it will have problems

    • Ethena is trying to reduce risk by placing funds in a 3rd party custodian like copper

  • ETH OI is like a bottleneck

    • Total ETH OI is 8.5B on exchanges where Ethena operates and is 12B across all exchanges

    • There will be an additional 31B OI on BTC contracts if they decide to use the BTC back algorithm

    • Arthur is also suggesting the use of staked SOL and shorting SOL positions

    • These numbers are still smaller than Tether's current capitalization, but when the total crypto market capitalization reaches 10kB$, the game will be different.

  • Risks from LSD

    • If Lido's smart contract has problems, Ethena will have problems

  • Negative funding rates have lasted too long

  • Risks from smart contracts

    • Ethena's deposit vault is quite simple

    • Ethena's complex processes are mostly offchain operations

Insurance fund

  • This fund currently has 16M$ to buy USDe in case a risk occurs

    • Funds come from Ethena's capital raising activities and profits from unstaken USDe

    • In the long run insurance funds will be capitalized at USDe interest rates

Ethena Valuation by Arthur Hayes

  • In the long term:

    • 20% yield will flow into the protocol treasury

    • 4% yield from ETH staking

    • 20% comes from funding fees

  • Compared to the FDV of other current stablecoin protocols, we have the expected FDV of the protocol in the image

Everything is unclear, but Ethena is considered very promising by the DCCK team. And from a user's perspective, an early access strategy will be a wiser strategy.