Charles Edwards, the creator of Capriole Investments, has generated notable buzz and discussion among cryptocurrency enthusiasts. He’s labeled Ethena (ENA) as “the next Luna,” but with an essential distinction: its economic foundation is considered robust and enduring.
Edwards clarified, “The investment is fully backed and the return fluctuates with market conditions. In contrast, Luna didn’t offer these features. At its peak, Luna’s value was over twenty times greater than ENA‘s current market cap. However, I want to remind you that ENA isn’t risk-free; there are custody and execution risks involved.”
Ethena’s economic foundation is sustainable. It’s fully collateralized and the return on investment fluctuates according to market conditions, unlike Luna which lacked these features. At its maximum, LUNA was valued over twenty times more than Ethena’s current worth. Ethena, like all investments, carries risk and requires careful custody.
— Charles Edwards (@caprioleio) April 10, 2024
After debuting on April 2 at a price below $0.30, ENA experienced an extraordinary surge, peaking at $1.45. The primary reason behind this growth is Ethena Labs’ upgrade of their rewards program, now in its second phase. This update grants users a 50% increase in rewards when they hold ENA tokens for at least seven days. By implementing this enhancement, Ethena Labs aims to boost user participation and commitment, creating a long-term ecosystem that supports the success of the Ethena platform.
An intriguing feature of this ecosystem is the swift expansion of its stablecoin, USDe, surpassing the supply increase of well-known alternatives like USDT, USDC, and DAI. In less than half a year, USDe has amassed a $2 billion supply.
USDe is the fastest growing USD denominated asset in the history of crypto
— G | Ethena (@leptokurtic_) April 8, 2024
Despite the substantial returns produced by tapping into derivative markets and staking Ethereum for this project, some industry insiders express reservations. Notably, Fantom’s founder, Andre Cronje, among others, have questioned the longevity of these profits, which currently lead the crypto market.
Risks Involved With Ethena
In the ongoing debate about risks, CL from eGirl Capital provides an intriguing take on derivatives trading. She explains, “It seems difficult for those not involved in derivatives trading to grasp that we’re prepared to pay significantly high interest rates, above 50%, just to enter a position.”
Significantly, crypto traders during the previous market cycle drove up the price of Bitcoin futures so significantly that it equated to an annual percentage rate (APR) of over 50%. This meant that collectively, we had paid approximately 2.4 billion dollars in funding rates by the end of 2021 – a sum equivalent to the GDP of a moderately-sized country.
Monetsupply.eth (@MonetSupply) from Block Analitica offers an in-depth exploration of the risks identified by Andre Cronje. By delving deeper into these concerns, Monetsupply brings to light several potential issues:
- Oracle Risk: The potential impact on exchange positions due to Ethena providing inaccurate quotes on minting or redeeming operations. However, MonetSupply notes, “there’s rate limits on this tho so max loss is constrained and counterparties are all whitelisted (can’t just run away with the money).”
- Liquidation Risk: Deemed not a significant factor as the portfolio is leveraged less than 1x, suggesting a conservative approach to borrowing and leverage.
- Spread Risk: The possibility of increased basis leading to higher funding revenue, which should theoretically attract inflows. Conversely, a negative basis might cause outflows, but Ethena could benefit from closing hedged positions profitably.
- Collateral Ratio Risk: Even though liquid staking tokens (LSTs) are given less than 100% weight on centralized exchanges (CEX), the overall low leverage mitigates this risk. The proportion of LST in spot collateral is relatively minor.
- Custody Risk: Highlighted as one of the more significant concerns, given the reliance on custodians with a good track record and the distribution of assets across multiple entities.
- Exchange Solvency Risk: This risk could lead to the loss of unsettled profit and loss (PnL) and some trading costs to rehedge on other exchanges. However, MonetSupply adds, “the Binance/ceffu nexus might change this assessment though, are they actually independent?”
- Ethena Entity Risk: The internal risk related to Ethena’s keys or authentication tokens being compromised, or a team member acting maliciously.
MonetSupply argues that although there are risks involved in using platforms like Morpho, the system’s use of overcollateralization, Maker surplus buffer, and MKR backstop, all reinforced by a substantial Proof of Liquidity (POL), effectively reduces these risks. In simpler terms, MonetSupply believes that these safety measures make the platform more resilient despite potential dangers.
At press time, ENA traded at $1.329.
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2024-04-10 17:11