Title: Ethena: A Hybrid Stablecoin Between CeFi and DeFi
Summary:
Ethena is a native synthetic stablecoin that acts as a structured passive income product, bridging the gap between centralized and decentralized finance. It securely holds assets on-chain and maintains stability through Delta-neutral positions while generating returns. Ethena was created to strike a balance between DeFi and CeFi markets.
Background:
Ethena was developed in response to the dominance of centralized stablecoins like USDT and USDC in the stablecoin market, as well as the increasing centralization of decentralized stablecoin DAI. Algorithmic stablecoins LUNA and UST experienced a massive surge in market capitalization but eventually collapsed. Ethena aims to find a middle ground and balance between DeFi and CeFi.
OES Service:
Ethena’s OES (Off-exchange Settlement) service allows institutions to securely custody assets on-chain and map the amounts to centralized exchanges for margin collateral. By keeping funds separated from exchanges on-chain, Ethena reduces the risks of misappropriation and insolvency. This setup retains the benefits of DeFi while ensuring ample liquidity from CeFi.
Underlying Income:
Ethena’s underlying income is derived from staking earnings in Ethereum liquidity derivatives and funding rate returns from hedging positions on exchanges. It is considered a structured income product that leverages the funding rate arbitrage strategy. The platform also incentivizes liquidity through a point system.
Ecological Assets:
Ethena’s ecosystem assets include USDe (a stablecoin minted by depositing stETH) and sUSDe (voucher tokens obtained by staking USDe). The ENA token is the protocol governance token, which can be locked to earn additional points.
Research Report Highlights:
1. USDe Minting and Redemption: Users can mint USDe at a 1:1 ratio by depositing stETH into the Ethena protocol. The stETH is sent to a third-party custodian, and the balance is mapped to exchanges through off-exchange settlement, allowing Ethena to open short ETH perpetual positions to maintain Delta neutrality or a fixed USD valuation.
2. OES – Off-exchange Settlement: OES combines the benefits of on-chain transparency and traceability with the use of funds on centralized exchanges. It utilizes MPC technology to construct custody addresses, ensuring transparency and decentralization. The addresses are jointly managed by users and custodians, eliminating counterparty risks and enhancing asset control.
3. Profit Generation: Ethena generates income through Ethereum staking rewards and funding rate returns from opening short positions on exchanges. Funding rates are periodically paid to traders based on the difference between spot prices and perpetual contract prices. Basis spread, the price discrepancy between spot and futures markets, also contributes to income.
4. Yield and Sustainability: Ethena has achieved a monthly annualized yield of up to 35%, with sUSDe reaching a yield rate of 62%. However, as market sentiment cools down, overall yields have shown a decline, with Protocol Yield dropping to 2% and sUSDe Yield falling to 4% in April.
5. Scalability: Ethena’s scalability is closely tied to the size of the perpetual market and ETH open interest. As the issuance of USDe surpasses the corresponding futures market capacity, its expansion becomes challenging. The expansion potential is dependent on market sentiment and the balance between long and short positions.
6. Risk Analysis: Ethena faces risks related to funding rates, custody, liquidity, and asset anchoring. To mitigate these risks, Ethena has established an insurance fund funded by protocol revenue distribution.
Conclusion:
Ethena aims to be a high-yield stablecoin with limited scalability in the short term, closely following market trends. The platform has introduced measures to address risks and has partnered with centralized exchanges to enhance liquidity and flexibility. However, the introduction of centralized elements also introduces centralization risks.
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