Posted on

Ethena (ENA) Is ‘The LUNA Of This Cycle’ With 20x Potential: Expert

Charles Edwards, the founder of Capriole Investments, has sparked significant interest and debate within the cryptocurrency community. He heralded Ethena (ENA) as “the Luna of this cycle,” but with a crucial difference: its economic fundamentals are deemed sustainable.

Edwards elaborated, “It’s 100% collateralized and the yield is variable based on market forces. Two things Luna wasn’t.” He also noted that at its zenith, Luna’s valuation exceeded ENA’s current market cap by more than twenty-fold, yet he cautioned, “ENA is not risk-free, custody and execution risk exist.”

Since its launch on April 2, ENA has seen a meteoric rise from under $0.30 to a high of $1.45. This rally is largely attributed to Ethena Labs’ strategic enhancement of its rewards program, now in its “Season 2,” which offers a 50% reward boost for users locking their ENA tokens for at least seven days. This move aims to bolster user engagement and loyalty, fostering a sustainable ecosystem for the Ethena platform.

A remarkable aspect of this ecosystem is the rapid growth of its stablecoin, USDe, which has outstripped the supply growth of established counterparts such as USDT, USDC, and DAI, reaching a $2 billion supply in just over 100 days.

However, the project’s high yields which are generated by harnessing the derivative markets and staked Ethereum have stirred skepticism among industry experts. Fantom founder Andre Cronje, among others, has raised concerns about the sustainability of these yields, which are the highest in the entire crypto industry.

Risks Involved With Ethena

Noteworthy, ENA is often compared to Terra Luna (LUNA), but the differences could not be much bigger, as Edwards also noted. While ENA is not risk free, a demise like the one of LUNA is highly unlikely. Despite that, investors need to be aware of other risks involved with ENA.

Diving deeper into the discussion of risks, CL (@CL207) from eGirl Capital offers an intriguing perspective on the behavior of derivatives traders. She clarifies, “It appears Ethena is making many people who don’t trade derivatives have a really hard time wrapping their heads around the fact that derivatives traders are so genuinely retarded that we’re willing to pay like 50%+ APR to enter a position.”

Notably, last cycle crypto traders were bidding futures so high that Bitcoin quarterlies earned “a locked-in >50% apr. She added, “just 50 days into 2021, we collectively paid 2,400,000,000$ in funding rates by the end of 2021, the market has paid as much as a decently sized country’s GDP.”

Monetsupply.eth (@MonetSupply) from Block Analitica provides a granular analysis of the risks Andre Cronje highlighted. Through his examination, several key areas of concern are outlined:

  • 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 concludes that despite these risks, the framework of overcollateralization on platforms like Morpho, the Maker surplus buffer, and the MKR backstop, supported by a substantial Proof of Liquidity (POL), serves as a robust mitigating factor.

At press time, ENA traded at $1.329.

Ethena ENA price

Posted on

Ethena’s (ENA) Crucial Role In Bitcoin Bull Market: Expert Identifies Critical Factors For Sustainable Growth

The recent volatility in the Bitcoin (BTC) price and its struggle to consolidate above the $70,000 mark has raised questions about the sustainability of its ongoing bull run.

However, market expert Charles Edwards, co-founder of Capriole Invest, believes that the decentralized finance (DeFi) protocol Ethena Labs (ENA) could significantly extend and boost Bitcoin’s bull market to new heights. 

In a recent post on social media site X (formerly Twitter), Edwards suggested that Ethena’s actions, such as constraining over-leverage in derivatives markets and reducing spot supply, can propel Bitcoin’s price higher for a longer period.

Bitcoin Bull Market Boost

To provide further context as to why Edwards is suggesting this possibility, on April 4th, Ethena Labs announced its intention to engage in a cash-and-carry trade involving Bitcoin. 

According to the protocol’s announcement, Ethena Labs can manage risk and provide a more stable backing for its product by buying and shorting Bitcoin. 

One of the key factors Edwards highlights is Ethena’s ability to constrain over-leverage in Bitcoin derivatives markets. By doing so, Ethena aims to prevent excessive risk-taking and potential market instability. 

Additionally, Ethena’s taking spot supply off the market can reduce selling pressure, thus supporting Bitcoin’s price and prolonging the bull market.

The protocol also noted that Bitcoin derivative markets offer superior scalability and liquidity compared to Ethereum (ETH). This characteristic reportedly makes Bitcoin a suitable asset for delta hedging, a risk management strategy employed by Ethena. 

With $25 billion of Bitcoin open interest available for Ethena to delta hedge, the capacity for its synthetic dollar product, USDe, to scale has increased significantly. Ethena Labs noted in their announcement the following:

In just 1 year, BTC open interest on major exchanges (exc. CME) has grown from $10bn to $25bn, while ETH OI has grown from $5 to $10bn BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity for delta hedging

Weighing The Risks

While Edwards’ statement is optimistic about Ethena’s impact on Bitcoin’s bull market, one user raised concerns about potential downsides. Edwards acknowledges that execution risks, such as custody failure or delta neutrality failure, could have adverse effects. 

Edwards identifies custody risk as the most significant risk in this context. However, he highlights that any negative impacts will likely be short-lived, and market forces will ultimately dictate Ethena’s net annual percentage yield (APY).

In short, by limiting over-leveraging in future markets and reducing spot supply, Ethena could significantly support the price of BTC and extend the current bull run.

Bitcoin

Currently, BTC’s price has experienced a significant decline, plummeting to the $68,800 level. This marks a 4.3% decrease compared to Monday’s price.

In parallel, Ethena’s native token, ENA, has also followed the overall downtrend of the market, reflecting BTC’s price movement with a 4% decrease. Presently, ENA is trading at $1.22.

Featured image from Shutterstock, chart from TradingView.com 

Posted on

Bitcoin Crash Warning: CryptoQuant CEO Sees LUNA-Like Risks Ahead

Ethena Labs has revealed its latest strategic move: the inclusion of Bitcoin (BTC) as collateral for its synthetic dollar-pegged product, USDe. This decision, aimed at significantly scaling the product’s supply from its current $2 billion, capitalizes on the burgeoning BTC derivative markets for enhanced scalability and liquidity in delta hedging practices.

Ethena Labs’ ambitious goal is to leverage the considerable growth of BTC open interest, which has seen a substantial rise from $10 billion to $25 billion in just one year, far outpacing Ethereum’s (ETH) growth rates. Ethena’s statement highlighted the strategic benefits of integrating BTC, emphasizing the superior liquidity and duration profile of Bitcoin compared to liquid staking tokens and the potential for USDe to achieve greater scalability as a result

“With $25bn of BTC open interest readily available for Ethena to delta hedge, the capacity for USDe to scale has increased >2.5x,” the announcement noted, illustrating the robust backing that BTC provides.

CryptoQuant CEO Issues Bitcoin Crash Warning

This move has not been met without skepticism. Ki Young Ju, CEO of the analytics firm CryptoQuant, took to X to voice his concerns, drawing parallels to the infamous LUNA collapse and questioning the risk management strategies employed by Ethena Labs.

“This isn’t good news for Bitcoin holders—it sounds like a potential contagion risk, like LUNA. How do they maintain a delta-neutral strategy for BTC in bear markets?” Ju queried, implying that the success of such strategies is largely contingent on market conditions that favor bull runs.

He further elaborated on the complexities of shorting BTC in bear markets, suggesting that the market size for such operations could be smaller than the total value locked (TVL), potentially leading to significant market disruptions. The CryptoQuant CEO stated:

How do they maintain a delta-neutral strategy for BTC in bear markets? In bull markets, they hold spot BTC and short BTC. If there’s a method to short BTC by holding some DeFi-wrapped BTC, the market size would be smaller than its TVL. This is a CeFi stablecoin run by a hedge fund, effective only in bull markets. Correct me if I’m wrong.

Ju added that he’S concerned about a repeat of a LUNA-like doom scenario: “selling BTC to stabilize USDe’s peg if their algorithm fails during bear markets.”

Adding to the discourse, OMAKASE, a former advisor for Sushiswap, referenced historical challenges faced by delta-neutral strategies, highlighting their propensity to turn illiquid and the difficulty in unwinding such positions without causing market slippage.

“Delta neutral strategies are usually never delta neutral. Post dot-com boom in Singapore, it took years for banks to unwind delta neutral books that had suddenly turned illiquid. Size begets slippage,” OMAKASE remarked, underscoring the inherent risks of such financial maneuvers.

The industry’s reaction to Ethena Labs’ announcement has been mixed, with some lauding the potential for increased scalability and others cautioning against the risks of replicating past financial crises. A few days ago, Fantom founder Andre Cronje also questioned the stability of USDe.

Amidst these concerns, Ethena Labs stands by its decision, pointing to the advantageous market conditions and the growing BTC derivative markets as key factors supporting their strategy. “While BTC does not possess a native staking yield like staked ETH, staking yields of 3-4% are less significant in a bull market when funding rates are >30%,” the company stated, indicating a strategic optimization for the current market environment. This move, according to Ethena, is not just about scaling but also about offering a safer and more robust product to its users.

At press time, BTC traded at $67,018.

Bitcoin price

Posted on

The Protocol: Using the Money Printer

If you have the money printer – as is the case for many of the blockchain projects with the power to create their own digital tokens – why wouldn’t you use it? PLUS: Vitalik Buterin riffs on meme coin and Ethereum’s new “blob market.”

Posted on

Ethena (ENA) Surges 60%, But Fantom Co-Founder Warns Of Luna-Like Demise

Ethena Labs’ new governance token, ENA, is witnessing a staggering 60% increase in its value, shortly after its introduction to the market. The spike in ENA’s price to approximately $0.96 has catapulted its market capitalization to nearly $1.34 billion, ranking ENA as the 80th largest cryptocurrency by market cap.

This ascent followed Ethena’s strategic distribution of 750 million ENA tokens, representing 5% of its total supply, through an airdrop to holders of its USDe token. The USDe, a synthetic dollar, is central to Ethena’s offering, leveraging a blend of ether liquid staking tokens and short Ether (ETH) perpetual futures positions to maintain a target value near $1.

At the heart of Ethena’s value proposition is the ENA token, engineered to facilitate a digital dollar platform on the Ethereum blockchain. This platform seeks to provide a viable alternative to conventional banking mechanisms through its innovative ‘Internet Bond’. By harnessing the potential of derivative markets and staked Ethereum, the Internet Bond offers a dollar-denominated savings instrument accessible globally, independent of traditional banking infrastructure.

The total supply of ENA tokens is capped at 15 billion, with an initial issuance of 1.425 billion tokens. The distribution plan prioritizes ecosystem development (30%), core contributor rewards (30%), investor engagement (25%), and foundation support (15%), embodying a holistic approach to tokenomics. Notably, Binance’s endorsement of ENA as the 50th project on its Binance Launchpool, enabling users to farm ENA tokens by staking BNB and FDUSD, underscores the token’s appeal.

At press time, ENA traded at $0.93, up 60% in the past 24 hours.

Ethena ENA price

Fantom Co-Founder Warns Of Luna-Like Collapse

Andre Cronje, co-founder of the Fantom Foundation, issued a warning on X, recalling the concerns that preceded the collapse of Terra Luna. Cronje dissected the structure of perpetual contracts (perps), a derivative product that enables traders to speculate on the price movement of an asset without holding the actual asset.

This mechanism operates on a system of funding rates meant to tether the perpetual price closely to the underlying asset’s spot price. However, Cronje highlighted a critical vulnerability in this system: the reliance on yield-generating assets, such as staked Ethereum (stETH), as collateral.

This approach theoretically allows for a “neutral” position, where the gains from yield should offset losses from the short position if the asset’s price drops. Yet, this equilibrium is precarious, as negative shifts in funding rates can erode the collateral, leading to liquidation.

“The mechanism – the theory here is that you can generate a ‘stable’ $1000, by buying $1000 of stETH, using this as collateral to open a $1000 stETH short, thereby achieving being ‘neutral’, while getting the benefit of the stETH yield (~3%) + whatever is paid in funding rates,” Cronje explained.

Cronje’s concerns are not unfounded. The crypto industry witnessed the dramatic implosion of Terra’s algorithmic stablecoin UST in 2021, a debacle that resulted in significant financial losses across the board. By drawing a parallel between the structural weaknesses he perceives in Ethena’s framework and the mechanisms that led to Terra’s downfall, Cronje raises a red flag about the sustainability of complex financial products that lack transparent risk mitigation strategies.

Responding to Cronje’s critique, the founder of Ethena Labs Guy Young aka Leptokurtic, acknowledged the validity of the concerns raised. “These aren’t mid curve concerns at all Andre Cronje, you rightly point out risks that absolutely do exist here. Will work on a longer form response for you by end of this week with some thoughts,” Young stated on X.