Analysis of the Ethereum synthetic dollar project ENA: an alternative “big short” in the bull market?

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What do you think of the newly launched Ethereum stablecoin synthetic USD project @Ethena on Binance launchpool? As far as data is concerned, it has accumulated more than US$1.5 billion in assets in three months since it was launched, and market expectations are extremely hot. However, after the Luna thunderstorm incident, talk of "reliance" has changed today. What will the emergence of Ethena bring to the Crypto world? Let me briefly outline a few personal views:

1) Any innovative on-chain stablecoin synthetic asset project has a basic value: it reduces users’ dependence on the traditional fiat currency banking system, because the traditional financial system cannot support users to quickly and efficiently make transactions between the U.S. dollar and cryptocurrency. Convert.

BitMEX founder Arthur Hayes once profoundly elaborated on this fact in an article titled "Dust On Crust": When more and more crypto-assets are separated from the exchange of fiat currencies, it is equivalent to grabbing the market cake with the banking system, so banks The system is not willing to provide services for crypto assets, and some banks that are willing to serve are only seeking to gain short-term high profits, which will bring backlash pressure to the crypto market.

The optimal solution is that the Crypto market needs a synthetic dollar system that does not rely on the traditional banking financial system, just like Satoshi Nakamoto’s original intention of inventing Bitcoin.

2) So, how does Ethena achieve the goal of stripping away the traditional banking system? Specifically, Ethena labs uses ETH as the underlying asset. When a user injects a certain amount of stETH assets into the protocol, the platform will Mint the corresponding USDe stablecoin asset. In order to ensure that the USDe value is always stable at around 1 US dollar, the platform has introduced A special mechanism: using the method mentioned in Arthur’s article to hedge cryptocurrency and equal futures short perpetual contract positions.

When the price of ETH rises, the price of ETH held by the platform increases in value, but its reverse perpetual contract will cause losses. On the contrary, when the price of ETH falls, the price of ETH held by the platform will cause losses, but its reverse perpetual contract will cause losses. Will bring benefits. Yes, this is almost consistent with the hedging concept we are accustomed to as individual users.

3) As a stable currency issuance platform, how can it continue to benefit and hedge corresponding risks?

1. In order to avoid the uncontrollable black swan thunder risk when stETH is deposited into CEX (FTX exchange), Ethna directly deposits it into custody platforms such as Cobo and CEFFU to avoid the huge risk of out-of-control liquidity;

2. Hold a large amount of stETH deposited by users. The platform can deposit it into the Ethereum POS consensus system to obtain a stable 3-4% APY income;

3. Potential benefits such as funding rates and spreads generated by the platform’s contract position transactions on the derivatives platform (APY is about 27%);

4. If the elite traders of the platform can make high-probability and accurate predictions about the supply, demand and market price of stablecoins in the market, they can also maximize their profits and continue to increase the supply of stablecoins: for example, When the platform determines that the supply of stablecoins in the market has increased, it can sell crypto assets and long on the market. On the contrary, it will continue to add crypto assets and short on the market. Of course, in the long run, the platform will definitely aim to increase the supply of stablecoins. The timely change of strategies in the process is the "space" to increase profits.

4) The four profit factors mentioned above can only reduce risks relatively speaking. Some potential risks actually exist objectively, such as:

1. The security and stability risks of staking to POS Validators (Slash);

2. The risk of loss if a trader makes a strategic mistake in opening a perpetual contract position on CEX, and the risk of misjudging the stablecoin supply and demand trend, long but the stablecoin supply business is stagnant;

3. Risks of contract transaction funding rates;

4. If stETH is used, there will be potential liquidation risks of price breakdown, etc. (the probability is low).

In short, Ethena’s philosophy of existence is based on the strong demand for stablecoins in the Crypto world. Therefore, as a newly issued stablecoin asset, it will definitely be popular in the market. The TVL growth during this period and the expected launchpool activities of Binance are all It has been verified that everyone is afraid of stablecoins as synthetic assets, and everyone hopes that stablecoins will be synthetic assets. Especially a stablecoin project that can continue to bring high APY with as little Ponzi risk as possible.

I personally believe that Ethena’s entry point anchored by the reverse hedging position in the contract market needs to be continuously observed, because the platform’s expansion of stablecoin issuance is destined to become a “big short” in the market to a greater extent.

In a market trend that continues to be bullish, it would be good if the issuance of stablecoins is the main motivation, but if the platform becomes more profit-oriented and wants to make money on the already stretched Ethereum DeFi protocol, it must also rely on Maximizing the benefits of trading strategies will be very challenging in the current unstable trading market.

However, the market always seems to be repeating similar stories. Big bull markets always seem to rely on some new financial assets or special models to detonate. Anyway, with a cautious attitude, just wait and see what happens.

Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
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