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Takeaway: Ethena’s crypto-native stablecoin challenges norms with rapid growth and high yields—but at what risk? Dive into the story.

Ethena’s Synthetic Dollar: Can It Redefine Stability in Crypto?  - Ethena Promise and Peril of Decentralized Finance

The crypto world has long tried to solve a critical problem: creating a reliable, stable currency. Stable assets are key to attracting serious investors. 

Many experiments have aimed to find the best solution. Some rely on cryptocurrency collateral. Others use real-world assets or yield-bearing tokens. Ethena’s approach? A crypto-native spin on stability and yield. 

Is it innovation, or a risk waiting to unravel? Let’s break it down. 

WHAT IS ETHENA? 

Ethena is an Ethereum-based protocol with a unique take on stablecoins. Its native token, USDe, works alongside sUSDe, a yield-generating token called the "Internet Bond." 

The idea is simple: deposit assets like Ethereum (ETH) to mint USDe. Then, stake USDe to earn yield. 

Unlike other stablecoins like USDT and USDC, Ethena keeps everything within the crypto ecosystem. This approach has helped USDe rise to the #3 spot among stablecoins, overtaking DAI in less than a year. 

Ethena’s Synthetic Dollar: Can It Redefine Stability in Crypto?  - Top 15 Stablecoins by Market Cap

HOW IT WORKS 

Ethena’s Synthetic Dollar: Can It Redefine Stability in Crypto?  - Ethena System Workflow

  1. Deposit Assets: Users deposit ETH or liquid staking tokens (LSTs) like stETH to mint USDe.
  2. Stake for Yield: Staking USDe earns sUSDe, which offers a competitive annual yield (APY).
  3. Off-Chain Support: Off-exchange providers (OES) hold assets in custody, while centralized exchanges (CEXs) manage derivative positions.
  4. Income Generation: Ethena earns income through staking rewards and futures market spreads. This income funds yields for sUSDe holders and builds a reserve fund. 

WHY IT’S GAINING TRACTION 

Ethena’s appeal lies in its fully crypto-native design and attractive APYs. Unlike over-collateralized stablecoins like DAI, Ethena’s model is more capital efficient. This has fueled its rapid growth, with over $6 billion in total value locked (TVL). 

Ethena’s Synthetic Dollar: Can It Redefine Stability in Crypto?  - USDe Supply vs sUSDe Supply

The protocol’s Internet BondsUSDeis central to its success. Users deposit assets, stake USDe, and earn interest, creating a cycle of growth that drives adoption. 

WHAT COULD GO WRONG? 

Ethena’s model comes with significant risks: 

  • CEX Dependency: Most of its income depends on futures funding rates on CEXs. If these exchanges fail, Ethena could face serious problems. 

  • Custodial Risk: Assets held by OES providers may face withdrawal delays or legal challenges. 

  • Negative Funding Rates: Ethena relies on positive funding rates. If rates turn negative, income could stop. 

Ethena’s Synthetic Dollar: Can It Redefine Stability in Crypto?  - Perpetual Futures Funding Rate 7DMA

  • Systemic Risk: With over 10% of perpetual futures markets tied to Ethena, its collapse could ripple through DeFi. 

Ethena’s $60 million reserve fund offers some protection. But prolonged negative funding rates could deplete it. 

LESSONS FROM TERRA 

Remember Terra and its stablecoin, UST? It soared, then collapsed in 2022. 

Ethena avoids Terra’s mistakes by diversifying risk and using stronger mechanisms. However, complexity adds fragility. Even small cracks in Ethena’s foundation could lead to a loss of confidence and a rush for the exits. 

SHOULD YOU CARE ABOUT ENA? 

Ethena’s governance token, ENA, has mixed benefits. While it gives holders voting rights, its value isn’t directly tied to Ethena’s growth. Staking ENA to earn sENA offers rewards, but 80% of the token supply remains locked, creating future dilution risks. 

Valuation metrics are also mixed. 

Ethena’s Synthetic Dollar: Can It Redefine Stability in Crypto?  - Stablecoin Protocols Valuation

ENA’s fully diluted valuation ($17 billion) far exceeds its current market cap ($300 million), raising concerns for long-term investors. 

THE BOTTOM LINE 

Ethena is pushing boundaries in the crypto world with its synthetic dollar and Internet Bond. Its rapid growth is impressive, but the risks are significant. For now, Ethena shows both the promise and peril of DeFi innovation. This story is far from over. 

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