Ethena, the decentralized finance (DeFi) platform, has witnessed an inflow of $340 million in just a few days following its launch. The platform brings an annualized yield of 27% for holders of its USDe tokens.
Users can participate by depositing stablecoins such as Tether (USDT), Frax (FRAX), Dai (DAI), Curve USD (crvUSD), and mkUSD to exchange Ethena’s USDe tokens, which can then be staked to earn rewards. However, unstaking entails a seven-day waiting period.
What sets Ethena apart is its innovative approach to yield generation. USDe maintains a target peg of $1, and its impressive yield is derived from two primary sources:
Firstly, Ethena stakes ETH in validators to earn a 4% return on the capital. Secondly, it deploys a strategy involving shorting ether futures contracts to earn the funding rate.
This mechanism allows USDe to utilize Ethereum collateral and perpetual contracts to back its tokens. Users deposit staked ETH, creating a positive delta on ETH prices. To mitigate risk, Ethena shorts an equivalent amount of ETH perpetual contracts, maintaining a delta-neutral position against Ethereum’s price fluctuations. Such a strategy aims to be directionally neutral, profiting from funding rates (which currently stand at approximately 23% annualized) and stakes (around 4%).
Ethena’s operational model has sparked curiosity and skepticism among observers. According to 0xngmi, a co-founder at DeFillama, two previous projects attempted a similar approach but ultimately abandoned it due to losses incurred when yields were inverted. “When yields invert you start losing money, and the bigger the stablecoin is the more money it loses,” he emphasized.
In response to these concerns, Conor Ryder, Ethena’s head of research, addressed them in a recent post. Ryder reassured users that the protocol had undergone rigorous testing based on historical data to mitigate potential risks. He explained that with the current high demand for long positions on ether, the futures rates for shorting the cryptocurrency are expected to remain favorable, providing stability for Ethena’s operations.
An important fact is that the funding rate is subject to fluctuations and may even turn negative in the event of a shift towards bearish sentiment. In such instances, Ethena has an insurance fund in place to ensure full collateralization of USDe. The majority of their venture capital is allocated towards bolstering this fund.
The information provided in this article is for reference purposes only and should not be considered as investment advice. All investment decisions should be based on thorough research and personal evaluation.
