$1.5 Billion TVL in Under 2 Months: What Is Ethena?

Most participants in the crypto market in 2022 would remember the astronomical rise and brutal collapse of the algorithmic stablecoin, TerraUSD (now renamed TerraClassicUSD), and its backing token, LUNA (now LUNC). The collapse of the Terra-Luna ecosystem shook the crypto markets, wiping more than $60 billion in value from the markets in just days. Since then, the concept of algorithmic stablecoins has been shunned like the plague and the market defaulted to fiat-backed stablecoins such as USDT and USDC.

 

However, less than three months after Ethena launched its synthetic stablecoin USDe, it skyrocketed to become the fifth most valuable stablecoin.

 

 

Ethena is a protocol on Ethereum designed to create a crypto-native stablecoin that is completely freed from the infrastructure of the traditional banking system. They sought to create a stablecoin that is globally accessible and scalable, while remaining censorship resistant.

 

This stablecoin is USDe, and has been dubbed by Ethena as the ‘Internet Bond’. The team got inspiration from an article written by Arthur Hayes, the co-founder of BitMEX. Arthur Hayes is one of the notable backers of Ethena, with his family office Maelstrom leading a $14 million strategic round.

 

Although Ethena only officially launched in February 2024, the protocol has already amassed a commendable $1.5 billion in total value locked (TVL), making it the 23rd largest DeFi application by TVL.

 

 

USDe is a synthetic dollar, achieved through a delta-neutral strategy built around ETH and ETH derivatives.

 

USDe minters deposit Lido’s stETH to mint a corresponding value in USDe. Simultaneously, Ethena opens a short position of the same value on a derivatives exchange. This creates a delta-neutral scenario, where a decrease in the value of the collateral, stETH, is almost perfectly offset by the increase in value of the short derivative position. On the other hand, when USDe is redeemed, the user receives stETH in equivalent value and the USDe is burnt. At the same time, a short position of the same value is closed. This enables USDe to maintain a stable value despite volatility in the value of the underlying collateral.

 

Since some of the derivative positions are executed on centralized exchanges, Ethena recognizes that it may be criticized for being partially centralized. However, Ethena’s key value proposition is that the entire system runs within the crypto ecosystem and holds no reliance on traditional finance infrastructure, rather than perfect decentralization. That said, that would also mean that USDe is exposed to risks relating to exchanges including exchange counterparty risks and external platform risks, which traditional stablecoins are not subject to.

 

At the moment, minting is only done by approved users in permitted jurisdictions who have undergone the KYC/KYB screening process. As such, these approved users are also responsible for ensuring price stability through arbitrage to restore the peg of USDe. For example if USDe fell under a dollar, said users could redeem less than $1 worth of USDe for $1 for profit, and vice versa.

 

 

 

 

Beyond just functioning as a synthetic dollar, USDe also generates its own yield. Users can receive this yield by staking their USDe as sUSDe. Users simply hold sUSDe to receive the generated yield which accrues directly to the sUSDe token, similar to how value accrues to RocketPool’s rETH. This yield is derived from two components, staking yield and funding and basis spreads on derivative positions.

 

Since the deposited collateral is an ETH liquid staking derivative, this earns staking yield from Ethereum which includes inflationary rewards, execution layer fees paid and maximal extractable value (MEV) captured.

 

On top of that, Ethena also earns the funding payments and basis spreads on the derivative positions used to maintain this delta-neutral position. These payments vary across market conditions and time periods but historically, this rate has largely been in Ethena’s favor, being generally positive in bullish markets and only slightly negative in bearish conditions. That said, if funding remains negative for prolonged periods, Ethena will use their insurance fund to cover the cost.

 

 

On 28 March 2024, the team announced the end of the Ethena Shards campaign on 1st April, after running for just over five weeks. The Shards campaign was Ethena’s point system, where users earned Shards for holding USDe, staking USDe as sUSDe, providing liquidity into USDe liquidity pools and utilizing USDe in various DeFi applications such as Pendle, Gearbox and Morpho. The campaign was designed to be a quick and efficient campaign, with a fixed deadline of three months or whenever the USDe market capitalization hit $1 billion.

 

With the total circulating supply of USDe swiftly surpassing $1 billion, Ethena announced the end of the Shards campaign as well as the upcoming airdrop and token generation event (TGE) for their governance token, ENA, on April 2.

 

Of the token supply, the 30% is allocated to Ecosystem Development, of which 5% will be allocated to reward users of the Shards campaign via the airdrop. The remaining 25% will be utilized for further incentive programs, including their upcoming Sats campaign, which kicks off immediately after the TGE. Most users will have their airdrop fully unlocked, with the exception of the top 2,000 wallets by number of Shards earned and holders of Pendle’s Yield Tokens (YT), which will have half their airdrop value subject to a six month linear vest.

 

 

 

 

The ENA token will be used in the governance of the protocol, which includes voting on risk management frameworks, USDe backing composition, custodian exposure, partnerships, integrations and more.

 

 

Binance announced the launchpool for the ENA token on March 29, as the 50th launchpool project. Users can now stake BNB or FDUSD in separate pools for three days to farm for ENA tokens, with the pools opening on March 30. After the launchpool ends on April 2, depositors will receive their respective token allocations from a pool of 300 million ENA tokens, or 2% of the total token supply. At the same time, the token will go live on the exchange for trading.