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Charles Edwards, the founding father of Capriole Investments, has sparked important curiosity and debate inside the cryptocurrency group. He heralded Ethena (ENA) as “the Luna of this cycle,” however with a vital distinction: its financial fundamentals are deemed sustainable.
Edwards elaborated, “It’s 100% collateralized and the yield is variable based mostly on market forces. Two issues Luna wasn’t.” He additionally famous that at its zenith, Luna’s valuation exceeded ENA’s present market cap by greater than twenty-fold, but he cautioned, “ENA shouldn’t be risk-free, custody and execution danger exist.”
Ethena is the Luna of this cycle, besides the underlying economics are literally sustainable. It is 100% collateralized and the yield is variable based mostly on market forces. Two issues Luna wasn’t. At it is peak LUNA was over 20X larger than what ENA is now. ENA shouldn’t be danger free, custody…
— Charles Edwards (@caprioleio) April 10, 2024
Since its launch on April 2, ENA has seen a meteoric rise from beneath $0.30 to a excessive of $1.45. This rally is basically attributed to Ethena Labs’ strategic enhancement of its rewards program, now in its “Season 2,” which affords a 50% reward increase for customers locking their ENA tokens for not less than seven days. This transfer goals to bolster consumer engagement and loyalty, fostering a sustainable ecosystem for the Ethena platform.
A outstanding side of this ecosystem is the fast development of its stablecoin, USDe, which has outstripped the availability development of established counterparts akin to USDT, USDC, and DAI, reaching a $2 billion provide in simply over 100 days.
USDe is the quickest rising USD denominated asset within the historical past of crypto pic.twitter.com/xgiRJjf96t
— G | Ethena (@leptokurtic_) April 8, 2024
Nonetheless, the undertaking’s excessive yields that are generated by harnessing the by-product markets and staked Ethereum have stirred skepticism amongst trade consultants. Fantom founder Andre Cronje, amongst others, has raised issues in regards to the sustainability of those yields, that are the very best in your complete crypto trade.
Dangers Concerned With Ethena
Diving deeper into the dialogue of dangers, CL (@CL207) from eGirl Capital affords an intriguing perspective on the habits of derivatives merchants. She clarifies, “It seems Ethena is making many individuals who don’t commerce derivatives have a very onerous time wrapping their heads round the truth that derivatives merchants are so genuinely retarded that we’re prepared to pay like 50%+ APR to enter a place.”
Notably, final cycle crypto merchants had been bidding futures so excessive that Bitcoin quarterlies earned “a locked-in >50% apr. She added, “simply 50 days into 2021, we collectively paid 2,400,000,000$ in funding charges by the top of 2021, the market has paid as a lot as a decently sized nation’s GDP.”
Monetsupply.eth (@MonetSupply) from Block Analitica offers a granular evaluation of the dangers Andre Cronje highlighted. By his examination, a number of key areas of concern are outlined:
Oracle Danger: The potential influence on trade positions because of Ethena offering inaccurate quotes on minting or redeeming operations. Nonetheless, MonetSupply notes, “there’s price limits on this tho so max loss is constrained and counterparties are all whitelisted (can’t simply run away with the cash).”
Liquidation Danger: Deemed not a major issue because the portfolio is leveraged lower than 1x, suggesting a conservative strategy to borrowing and leverage.
Unfold Danger: The opportunity of elevated foundation resulting in larger funding income, which ought to theoretically appeal to inflows. Conversely, a damaging foundation may trigger outflows, however Ethena may benefit from closing hedged positions profitably.
Collateral Ratio Danger: Regardless that liquid staking tokens (LSTs) are given lower than 100% weight on centralized exchanges (CEX), the general low leverage mitigates this danger. The proportion of LST in spot collateral is comparatively minor.
Custody Danger: Highlighted as one of many extra important issues, given the reliance on custodians with monitor report and the distribution of property throughout a number of entities.
Change Solvency Danger: This danger might result in the lack of unsettled revenue and loss (PnL) and a few buying and selling prices to rehedge on different exchanges. Nonetheless, MonetSupply provides, “the Binance/ceffu nexus may change this evaluation although, are they really unbiased?”
Ethena Entity Danger: The inner danger associated to Ethena’s keys or authentication tokens being compromised, or a crew member appearing maliciously.
MonetSupply concludes that regardless of these dangers, the framework of overcollateralization on platforms like Morpho, the Maker surplus buffer, and the MKR backstop, supported by a considerable Proof of Liquidity (POL), serves as a strong mitigating issue.
At press time, ENA traded at $1.329.
Featured picture from Bitget, chart from TradingView.com
Disclaimer: The article is offered for academic functions solely. It doesn’t characterize the opinions of NewsBTC on whether or not to purchase, promote or maintain any investments and naturally investing carries dangers. You’re suggested to conduct your personal analysis earlier than making any funding choices. Use data offered on this web site fully at your personal danger.
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