Each day, Coinrule will run through the state of the digital assets market for Blockbeat, your home for news, analysis, opinion and commentary on blockchain and digital assets.
On Monday, Ethena, the Decentralised Finance (DeFi) protocol “enabling the internet bond”, opened its doors to users.
The eye-catching high yield that the protocol pays out on USD stablecoins immediately attracted a lot of interest. Some of that interest is negative.
Not since Luna’s UST stablecoin, that famously collapsed at the end of the last bull cycle, have yields in DeFi been that high.
Currently, Ethena has a total value locked (TVL) of over $350 million, over 10,000 users and over 27 per cent APY for its USDe stablecoin. It achieves the yield in two steps.
First, Ethena passes on Ethereum staking yield of around 3.5%. This yield is paid to Ethereum stakers for securing the Ethereum Blockchain.
Ethena pairs this yield with providing funding for Ethereum shorts. These are bets that the future price of Ethereum will be lower.
The funding rates for these positions are dynamic but currently pay out 23-25 per cent. The staked Ethereum and Ethereum short positions act as collateral – maintaining USDe’s stability. The Ethena stablecoin is designed to be ‘delta-neutral’, so not impacted by market movements up or down.
The system is thought-through and certainly does not have the ponzi-characteristics of Luna/Terra. But DeFi observers are concerned about what happens when funding rates go negative. This is less of a risk in a bull market. In a bull market, traders tend to buy, i.e. ‘go long’ instead of sell, i.e. ‘short’.
In a bear market this dynamic can turn quickly. Ethena established an initial insurance fund of $20 million to ensure cover for its yield.
However, the only way to ensure long-term sustainability is a lasting bull market with future positive funding rates. Is this possible?
Ethena’s success could be its biggest downfall. Increasing TVL leads to increasing shorts – pushing funding rates lower, even during a bull market. This would decrease yields and make the system less attractive.
Evidently, the market is now questioning new products more than in the past – a good sign of a maturing market.
However, maturity aside, money talks. Airdrop and yield farmers will likely drive Ethena’s TVL higher regardless of its long-term sustainability. The farmers’ quest for APY and free money continues, at least while market sentiment is positive.