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Author: Jack Inabinet, Bankless Analyst; Translation: Bit Chain Vision Xiaozou
On February 19, Ethen Labs opened its synthetic US dollar stable currency deposit to the public, becoming a hot topic that almost everyone cares about discussions on Crypto Twitter.
Through the yields of dual digits and providing points for the upcoming airdrops, Ethena’s USDE stablecoin has expanded rapidly, which has exceeded $ 770 million in supply, becoming the sixth largest US dollar hook stablecoin!
Although the rise of Ethena is really impressive, the project is not without criticism. They are skeptical of Ethena’s high returns and think that its design method makes it easier to collapse like Terra/Luna ecosystems.
In this article, we will discuss what Ethena is, and analyze the risks of the agreement to help you understand whether this opportunity is suitable for you, and then make wise decisions!
1. Ethena isWhat?
First of all, whether in the encryption market or in the traditional financial market, Basis Trands has a long history and is a arbitrage of price differences between spot assets and futures tools.
The most common methods of these transactions are multi -spot assets and short -term corresponding futures. Due to the demand for leverage and the cost of holding spot assets, futures tools are usually traded at futures premiums (that is, higher than the target price).
The crypto market has always been operated by futures premium trading, which means that the price of perpetual futures contracts usually exceed the price of spot assets, which has led to an environment with a positive net financing interest rate.The position of position holding.
In this case, people can easily deploy the profit -based Delta neutral basis transactions through the nominal value of the spot encrypted assets and hedging their positions through PERPS, so that users of this strategy are allowed to be exempted from cryptocurrency price fluctuations.The influence allows them to obtain benefits from financing payment.
Ethena is essentially an open hedge fund that uses the above strategies to earn income and turn its transaction mortgage to token into stablecoins!
Ethena uses liquidity pledged ETH token as a mortgage, and the equal amount of ETH is used to create a investment portfolio with Delta 0. This configuration ensures that the net value of the assets held by Ethena fluctuates without changes in the basic value of their assets. At the same timeObtain income from ETH pledge and its short financing payment.
There have been multiple protocols that have similar strategies to Ethena, but due to their dependence on decentralized trading venues, the previous iteration is difficult to expand.Ethereum uses a centralized exchange like Binance to avoid this liquidity limit.
In order to protect the user’s mortgage, Ethena uses OES settlement (OES) solutions to hold funds by a reputable third -party custodian institution and only map the account balance to CEX to provide transaction margin to ensure that the funds will never be deposited into the centerExchanges.
Because the pledge ETH can be perfectly shedding with a short position value of the same value, the USDE can be cast at a mortgage ratio of 1: 1, so that Ethena’s capital efficiency is equivalent to the stablecoin (such as USDC and USDT) supported by US dollar assets, and at the same time, it has avoided it.Dependence on obtaining assets from the traditional financial market, and asset issuers in the traditional financial market must comply with the provisions of the physical world.
Although Ethena currently only uses the pledge ETH as the mortgage, the agreement may further use BTC as a mortgage to achieve a larger scale, but this may dilute the income of USDE because the BTC mortgage will not generate pledge income.Essence
2. What is the worst situation in Ethena?
In the encryption world, there is no economic return without corresponding risks.Ethena opportunity participants should not expect other answers.
Although a generous financing interest rate and pledge income will definitely bring an attractive APY annual yield, it is not no risk …
In addition to the expected standard encryption risks of DEFI users, Ethena also has some atypical risk factors, which has caused alerts and also caused comparison with the Terra/Luna algorithm UST stable currency.
(1) The risk of decoupling of mortgages
Ethena’s main risk is to mix the use of LST mortgages and ordinary Ethereum shorts.Although this optimization of ETH -based transactions helps to maximize the sustainable benefits of the agreement, it increases risks!
If Ethena’s LST mortgage is decoupled from ETH, Ethena’s ETH shortness will not be able to capture fluctuations, causing the protocol to suffer from book losses.
Although LST’s transactions are usually close to their hooks, we have witnessed the various decourse situations of these tokens. For example, during the black swan liquidation incident of 3AC (three arrow capital) in the middle of 2022, the STETH price of Lido was greatly reduced, approaching approaching, approaching8%!
In April 2023, the Shapella upgrade enabled the Ethereum pledge withdrawal function, which made the 3AC liquidation create the most extensive decoupling we see in the blue chip LST, but the fact is still that any future decourse event will be given to Ethena’s.The deposit requirements (the amount of funds must be deployed to the exchange to keep it hedge and open, and avoid the position of its positions).
Once the liquidation threshold is reached, Ethena will be forced to achieve losses.
(2) Financing interest rate risk
Although the earnings of Ethena may seem amazing from the beginning, it is important to note that there were two agreements that have previously tried to expand the scale of the Synthetic dollar stable coin, but because the yield is upside down, it has ended with failure.
In order to fight for negative financing income, Ethena used the pledge ETH as a mortgage. This strategy reduced the number of days of negative yields in the three -year data recovery test from 20.5%to 10.8%.
Although 100%can be determined that the financing interest rate will be upside down at a certain point, the natural state of the encrypted market is a futures premium transaction, which puts pressure on the financing interest rate and provides a favorable environment for Ethena’s base difference transaction.
(3) Trading risk of opponents
Many people who are unfamiliar with Ethena believe that the deployment of user mortgages to a centralized exchange is a major risk, but the use of the above OES custody account has greatly reduced this risk.
Although the non -settlement hedging profit on the bankruptcy exchange may bring losses, Ethena sets up PNL (profit and loss) settlement at least every day to reduce the capital exposure to the exchange.
If an exchange of Ethena bankruptcy, the agreement may be forced to use leverage for other exchanges’ positions to make the investment portfolio DELTA neutral until the position of the unsuccessful position is settled.Release funds.
In addition, if Ethena’s OES account’s custodian bankruptcy may be delayed, the fund acquisition may be delayed, which needs to use leverage on other accounts to hedge the investment portfolio.
(4) General encryption risk
Like many early encryption agreements, it is important to remember that Ethena’s depositors are facing the risk of the agreement team to deceive user funds, because the ownership of the project key has not yet achieved decentralization.
Although most encrypted projects are facing a large number of hackers’ attack risks in their potential vulnerabilities in their smart contracts, Ethena uses OES custody accounts to reduce this risk by eliminating the use of complex smart contract logic.
3. Summary
In the case of the exchange or custodian bankruptcy, Ethena protects asset security and formulates an emergency plan. With the frozen assets and cannot be traded, their investment portfolio Delta becomes neutral!
Because many exchanges implement a zero mortgage discount rate on its STETH mortgage value, and provide 50%of the deposit requirements for Ethena -scale accounts, the agreement may lead to 65%of its mortgage market value loss at the time of liquidation!
Negative financing interest rates may lead to compression of yields and TVL loss, but negative financing interest rates themselves do not cause the US dollar depreciation.Based on the highest -100%annualized financing interest rate, the name loss of Ethena every 8 hours of financing is only 0.091%!
The most important thing is that Ethena also has an insurance fund that can be used to supplement the security account to avoid being liquidated, offset long -term negative financing yields, or the last buyer of USDE in the open market!
Although Ethena can bear a certain degree of losses through insurance funds, don’t forget Murphy’s law. It reminds us that anything that may be wrong will be wrong, or at the worst time.
Imagine the situation where LST started deciring.
The centralized exchange responded by reducing the mortgage weight of the liquidity pledge ETH token, thereby reducing the maximum loss that Ethena may suffer from the value of the mortgage market before liquidation.
Suppose that the entire market is also selling during this period, the financing interest rate will become negative, and further pressure on Ethena’s mortgage will be put on, and the agreement will be closer to liquidation, and losses have to be achieved!
In normal operations, Ethena may not use leverage, but the accident bankruptcy of the exchange or custodian may temporarily freeze the funds, so leverage is needed to neutralize the investment portfolio Delta.
Theoretically, a large discount, coupled with leverage accounts and smaller liquidity pledge ETH mortgage weights, can make Ethena’s mortgage within the scope of liquidation.
Now any encrypted person can conduct a basis trading, Ethena can easily expand to a billions of dollars of management scale, which means that the clear pledge ETH investment portfolio may further suppress the LST market value and exacerbate Ethena’s book losses.And open the door for the following death spiral!
There is no doubt that the above series of events may only be the result of the black swan disaster, but you must know what the potential risks you may face in the encryption world.
