Chainfeeds Summary:
Ethena has significantly increased the adoption of the entire DeFi ecosystem through billions of dollars in growth. However, if Ethena fails, it will have a profound impact on many protocols such as AAVE, Morpho, and Maker, causing them to become insolvent to varying degrees. Therefore, the question is whether Ethena will destroy the DeFi we know, or usher in a new Renaissance for DeFi? This article delves deeper into this issue.
Source:
https://mp.weixin.qq.com/s/Sdk_iluY6TChHsO1V0X9MA
Author:
DC | In SF
Viewpoint:
0xUnicorn: Overall, Ethena is like BTC in that it benefits from financial speculation and the crypto bull market, but in a more stable manner. As crypto prices rise, more and more traders want to go long on BTC and ETH, while fewer traders are willing to go short. Due to the supply-demand relationship, the traders who go short pay fees to the traders who go long. This means that traders can hold BTC while also shorting the same amount of BTC, thereby achieving a neutral position, where the gains and losses of the long and short positions offset each other, while the trader still earns interest income. Ethena's operation is entirely based on this mechanism; it leverages the lack of sophisticated investors in the crypto market, who are more interested in earning yield rather than simply going long on BTC or ETH. A major risk of this strategy is the custodial risk of exchanges, as evidenced by the FTX collapse and its impact on the first-generation delta-neutral managers. This is one of the key reasons why Ethena has chosen to use Copper and Ceffu as trusted intermediaries to hold assets and assist Ethena in interacting with exchanges, while avoiding exposing Ethena to the custodial risk of exchanges. In turn, the exchanges can rely on Copper and Ceffu, as they have legal agreements with the custodial institutions. The net profit and loss (the amount Ethena needs to pay to the long traders, or the amount the long traders owe to Ethena) is settled periodically by Copper and Ceffu, and Ethena systematically rebalances its positions based on these settlement results. This custodial arrangement effectively mitigates the exchange-related risks while ensuring the stability and sustainability of the system. What are Ethena's main real concerns? Essentially, there are a few scenarios. First, the funding rate could turn negative, in which case, if Ethena's insurance fund (currently around $50 million, sufficient to withstand a 1% slippage/loss on the current TVL) is not enough to cover the losses, Ethena will incur losses. Another risk is the custodial risk, i.e., the risk of Copper or Ceffu attempting to operate with Ethena's money. The fact that the custodians do not have full control of the assets mitigates this risk. The exchanges do not have signing authority and cannot control any wallets holding the underlying assets. The third is liquidity risk. To manage redemptions, Ethena must simultaneously sell its derivative positions and spot positions. If the ETH/BTC price experiences violent fluctuations, this could be a difficult, expensive, and time-consuming process.
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