Original Title: Ethena: The Trillion Dollar Crypto Opportunity
Author: Eugene Ng Ah Sio, Crypto Trader, KOL;
Compiled by: 0xjs@Jinse Finance
TLDR:
Ethena is the fastest growing DeFi product in history. Within just a few months, its yield-bearing stablecoin has expanded to $3 billion, and no other stablecoin has grown as fast as USDe since its inception. The first chapter of the Ethena story focuses on building a secure and superior stablecoin. After successfully weathering extreme market volatility, it now seeks to chase the biggest prize in the crypto space - Tether's $160 billion meal.
This is where Ethena begins to transition from a "DeFi native stablecoin" to a fiat stablecoin competitor with a superior value proposition and significantly improved distribution channels. The launch of USTb, the latest participation of Blackrock's government bond products, and the decline in interest rates have created opportunities for Ethena, and it is now in a favorable position to make USDe the dominant stablecoin in the crypto space.
Due to the inefficiency of the market, you now have the opportunity to buy the most powerful new competitor in the largest vertical sector of the crypto space, which has only a quarter of the market cap of WIF.
Current Market Situation
This cycle has been dominated by memecoins. The market has recognized the market manipulation game of buying tokens of relatively unproven VC projects, whose valuations are astronomically high, several times higher than the cost basis of most VCs. In contrast, we have fully embraced the more libertarian memecoins game. The performance of memecoins has continued to outperform other Altcoins, leading to what some perceive as "financial nihilism" - ignoring all fundamentals in pursuit of narratives. While this has been the most profitable trading in the crypto space over the past 2 years, it has become increasingly prevalent, even drawing attention to the historical highs of memecoins.
Attention to memes reaches historical highs Source: Kaito
As the market becomes intoxicated with memecoins, it slowly forgets one eternal lesson that all markets teach:
The most powerful speculation is always built on at least some basis of fact
The rise of memecoins is primarily a crypto-native, retail-driven market phenomenon. What these retail participants forget is that over time, the most liquid currencies are always built on parabolic growth based on fundamentals. This is because only with a fundamental anchor will all the crypto-native capital pools (retail, hedge funds, prop shops, long-only flow funds) find their Schelling point. This is the story of SOL this cycle, where those who focused on developer engagement in early 2023 were able to build a fundamental case for the growth of the Solana ecosystem, and then enjoyed a near 10x revaluation within a year.
You may also remember the 500x liquidity of Axie Infinity and the hundreds of millions of players they attracted at the peak of excitement. Another very familiar reference is the $40 billion global circulation of Luna's UST, and the 1000x gains you could have achieved in 18 months (assuming you bought LUNA from the bottom and correctly hedged the spiral risk to exit in time).
While financial nihilism is the overall trend dominating this cycle, one might argue that it is precisely because the current venture projects lack a strong PMF that this erroneous consensus view has emerged.
However, it only takes one project to reignite the public's dreams.
I believe Ethena is the most qualified candidate to play that role this cycle.
Fundamentals
When it comes to stablecoins, there are really only two things that matter.
1. Value Proposition - Why would you hold this?
Ethena's product and value proposition are very simple. Deposit $1, get a delta-neutral position between staked ETH and an ETH short position, and earn a yield. Assuming financing rates normalize, sUSDe offers the highest sustainable yield (10-13% APY) of any stablecoin today. This substantive value proposition has made Ethena the fastest growing stablecoin in history, reaching a peak TVL of $3.7 billion in 7 months, and stabilizing at $2.5 billion after financing rates declined.
In terms of yield, USDe is far superior to all other DeFi products
At first glance, it's clear that sUSDe is the undisputed yield king of all cryptocurrencies. Why would you hold Tether today and forgo all the potential earnings of the dollar? Likely because it is the easiest to obtain and the most liquid. This leads us to...
2. Distribution - How easy is it to acquire and use as a medium of exchange?
When launching any new stablecoin, the distribution channel is the most important factor determining adoption. USDT is the #1 stablecoin today because it is the base currency for any market on any centralized exchange. This is a huge moat in itself, and new stablecoins need years to start gaining market share.
However, USDe has managed to do something very special. With the support of Bybit, it has been made available to users on the second largest CEX, with an embedded auto-yield feature. This allows users to access a higher quality stablecoin collateral without adding friction. So far, no other decentralized stablecoin has been integrated into any major CEX, indicating how difficult this feat is.
Source: ArtemisThe current stablecoin supply on centralized exchanges is around $38.6 billion, about 15 times the current USDe supply. If just 20% of that stablecoin supply thinks it's better to earn 5-10% yields on USDe, that would mean the addressable market for USDe would grow nearly 4-fold. Now imagine what would happen if all the major centralized exchanges adopted USDe as their collateral.
Catalyst 1: Structural Decline in Interest Rates
Since Ethena's inception, the relative yield premium of sUSDe has averaged 5-8% above the federal funds rate. This structural advantage has driven tens of billions of dollars of yield-seeking capital into Ethena in the first 9 months after launch.
Latest Fed Dot Plot (Sep 2024)Powell's 50bps rate cut in September marks the beginning of a sustained decline in global risk-free rates. The dot plot currently estimates the federal funds rate at 3-3.5% in the steady state, implying a ~2% rate decline over the next 24 months. However, this is unrelated to Ethena's yield sources, in fact one could argue it has a positive indirect drip effect on financing rates (market up -> risk-reward -> leverage demand -> financing rates up).
When combined, this potent mixture of these two forces will cause the spread to skyrocket, and this is the true value proposition of the Ethena product.
When the funding rate declines, the benchmark yield premium falls from around 10% to 2%
The supply of USDe is highly sensitive to the yield differential related to US Treasuries
Referring to the two charts above, it is clear that the demand for USDe is highly sensitive to the US Treasury yield premium. In the 6 months prior to the rise in the yield premium, the supply of USDe surged. As the premium declined, the demand for USDe naturally also gradually decreased. With this historical data, I believe the reversion of the yield premium will once again accelerate the growth of USDe. Importantly, this tailwind is both easy to understand and appealing to most market participants.
Over time, I expect this will significantly increase Ethena's market share, just as Luna and UST dominated in 2021 as DeFi yields began to decline and the 20% collateral in Anchor became increasingly popular.
Catalyst 2: USTb
USTb was first launched two weeks ago, and in my view, it is absolutely a game-changing product that can enhance the adoption of USDe.
The key points about USTb are:
- A stablecoin fully backed by Blackrock and Securitize
- Functionally identical to other stablecoins, earning yields from US Treasuries, but without adding custodian/counterparty risk
- Can become a subset of USDe, so that when TradFi yields > crypto yields, sUSDe holders can earn the Treasury yield
The market has underestimated this, because now, apart from USDe, there is almost no reason to hold any other crypto stablecoin, as long as you can trust that exchanges like Binance won't go bankrupt (even if they do, USDe won't drop to zero, as it is fully collateralized by BTC and stETH). In the worst case, you'll get similar yields to competitors, and if not, you'll get yields based on your risk preference in the market.
By integrating USTb on the backend, the yield volatility of sUSDe is now significantly reduced, thereby eliminating the biggest concern about Ethena being unable to generate sustainable yields in a bear market. The reduced yield volatility also increases the chances of future CEX integrations.
With these two catalysts, Ethena has a comprehensive premium stablecoin, and it now dominates all other competitors.
Token Economics: The Good, The Bad, and The Opportunity
One of the downsides of VC tokens is that if you hold the token long enough, you naturally become the exit liquidity for early investors, the team, and other token reward recipients. This alone has caused the entire market to completely abandon the most product-market-fit crypto of this cycle in favor of pure memecoins.
Ethena is no different from the typical VC token. Since its peak, ENA has declined by around 80% due to the increase in issuance valuation and the entry of airdrop supply into the market. In these 6 months, the first season's airdrop has already fully unlocked, with 750 million tokens entering the market. These unlocks, combined with the decrease in demand for leverage, have ultimately shattered the ENA narrative, which is why no one owns this currency today, and why I strongly suspect a violent re-rating will occur.
So why should you engage with this evil VC token now? The answer is simple - the amount of ENA entering the market in the next 6 months will drop sharply, greatly suppressing the selling pressure. Yesterday, the first batch of tokens was released, and out of the total $1.25 billion in new ENA supply, airdrop recipients only claimed $30 million, choosing to lock up the rest. Given that airdrop recipients have been the main marginal sellers in the past few months, what will happen when they stop selling? The price has already found a natural bottom at $0.2, and is now forming a historical bottom at $0.26.
From now until April 2025, the only additional inflation will be the remaining ~$300 million in airdrop rewards entering the market, but at a 28 cent price, this equates to around $450,000 per day (less than 1% of daily trading volume). From this perspective, despite the TAO inflation pressure of up to $4-5 million, it has still risen 250% in the past month. The key point here is that when the stars align, unlock inflation will rarely have a significant impact on the token's re-rating. After April 2025, the team/VCs start unlocking, so this gives us about 6 months to play out the above argument.
How Big Is The Dream?
Although ENA is the only major new product with a clear PMF this cycle, ENA is not even in the top 100 on Coingecko. From a technical analysis perspective, the HTF chart of ENA looks very clean. Combined with the fundamental drivers + reduced inflationary pressure, I can easily envision ENA recovering to the $1 level. This wouldn't even bring ENA's market cap to the level of $WIF, just reaching the recent $1.5 billion high of the POPCAT circulating supply.
Looking further, Ethena has the foundation to scale USDe to hundreds of billions, and then trillions of dollars. Ultimately, as crypto stablecoins further gain market share for international cross-border payments, a trillion dollars is not impossible. At this point, if ENA, as the best product chasing the largest crypto market, is not a top 20 token, it would be surprising.
When we'll get there, no one can say for sure, but I believe Ethena is the next big crypto dream of this cycle.
