Original author: Eugene
Original translation: 1912212.eth, Foresight News
Ethena is the fastest growing DeFi product in history. Its yield-generating stablecoin has reached $3 billion in just a few months, and no other stablecoin has grown as fast as USDe since its inception. The first chapter of Ethenas story focused on building a safe and superior stablecoin. It has withstood extreme market volatility and is now undoubtedly targeting the biggest rival in the stablecoin space - Tether, with a market cap of $160 billion.
Ethena has transformed from a DeFi native stablecoin to a compliant stablecoin with excellent value proposition and significantly improved distribution channels. The launch of USTb, the latest participation of BlackRocks treasury products, and the decline in interest rates have created favorable conditions for Ethena to now be in a leading position, and these conditions are expected to make USDe a mainstream stablecoin in the cryptocurrency field.
With so many market inefficiencies, you now have the opportunity to buy into the strongest and rising asset in the largest vertical in the cryptocurrency space for a quarter of WIF’s market cap.
Existing metanarrative
This cycle has been dominated by memes. The market has realized that paying for tokens of unreliable projects with outrageous valuations that far exceed the costs of most VCs is a rigged game. Instead, we have fully embraced the more free and open meme game. The continued outperformance of memes relative to other altcoins has led some to believe that this is financial nihilism - ignoring all fundamentals in pursuit of narratives. While this has been the most profitable trade in the cryptocurrency space in the past two years, it has become increasingly common and has even brought unprecedented attention to memes.
As the market becomes intoxicated by the frenzy of the meme, it gradually forgets the eternal lesson that all markets teach: the hottest speculation is always based on a hint of truth.
The rise of the meme is primarily a cryptocurrency-native, retail-led phenomenon. What these retail participants forget is that the best performing liquid assets over the long term are always built on parabolic growth at the fundamental level. This is because only fundamental anchors can provide a Schelling point (i.e. a critical point or equilibrium point that all participants agree on) for all crypto-native capital pools (retail investors, hedge funds, proprietary trading funds, long-only liquidity funds). This is the microcosm of the Solana story in this cycle, and those investors who focused on developer participation in early 2023 were able to form a fundamental thesis about the growth of the Solana ecosystem and enjoy almost a 10x valuation increase in the following year.
You may remember the 500x surge in Axie Infinity liquidity and how they attracted millions of players at the peak of the market frenzy. Another familiar example is Luna’s $40 billion UST circulating globally, which could have achieved a 1,000x return if you bought Luna from the lows within 18 months and correctly assessed the risk of a downward spiral and exited in time.
While financial nihilism is the dominant trend of this cycle, one could argue that it is the current lack of strong product-market fit (PMF) in venture funding that has led to this distorted consensus view. However, it only takes one project to make the masses dream again.
I believe Ethena is the strongest candidate to take this position in this cycle.
Fundamentals
When thinking about stablecoins, there are really only two things that matter.
Value Proposition – Why should you own it?
The Ethena product and value proposition is fairly simple. Deposit $1 and you will earn a delta-neutral position consisting of staked ETH and a short Ethereum position. sUSDe offers the highest sustainable yield among stablecoins today (10-13% annualized yield), assuming normalization of funding rates. This substantial value proposition has made Ethena the fastest growing stablecoin in history, reaching a peak TVL of $3.7 billion in just 7 months, and now stabilizing at around $2.5 billion after a reduction in funding rates.
The delta neutral position mentioned here refers to an investment strategy that aims to offset the impact of price changes by holding both long and short positions in an asset, thereby keeping the market value of the position relatively stable. In the case of Ethena, this strategy is achieved by staking ETH (long) and holding a short position in ETH, with the goal of earning income while keeping the value of the position relatively stable.
As a stablecoin issued by Ethena, sUSDe has achieved rapid growth by attracting a large number of users by offering high yields. However, it should be noted that high yields are often accompanied by certain risks. Investors should also pay attention to potential risk factors while pursuing high returns. In addition, changes in funding rates will also affect the yield and total locked volume of stablecoins.
At a glance, it’s clear that sUSDe is the undisputed high-yield king in the crypto space. Why would you hold Tether today and give up all the gains you could make on your USD? Most likely because Tether is the easiest to access and the most liquid. Which brings us to our second point…
Distribution – How easy is it to acquire and use it as currency?
When launching any new stablecoin, the distribution channel is the most important factor in determining its adoption rate. USDT is the number one stablecoin today because it is the base currency for any market on every centralized exchange. This in itself is a huge moat, and it will take years for emerging stablecoins to start taking market share.
Yet, USDe has done just that. With the support of Bybit, it has become the second largest stablecoin available to users on a centralized exchange, with automatic yield generation built into the platform. This allows users to access a higher quality stablecoin collateral without adding additional friction. To date, no other decentralized stablecoin has been accepted by any major centralized exchange, which is enough to show how rare this achievement is.
The total amount of stablecoins currently stored on centralized exchanges is about $38.6 billion, which is 15 times the current supply of USDe. Even if only 20% (a small portion) of the supply decides that earning 5-10% on USDe is more cost-effective than giving it up, it would mean that the serviceable market for USDe would almost grow 4x from here. Now, imagine what would happen when all major centralized exchanges take USDe as collateral?
Catalyst 1: Structural decline in interest rates
Since Ethena’s inception, sUSDe’s relative yield premium over the Fed Funds rate has averaged 5-8%. This structural advantage has led to billions of dollars of yield-seeking cryptocurrency capital flowing into Ethena in the first nine months after Ethena’s launch.
Powell cut the Fed Funds rate by 50 basis points in September, marking the beginning of a long-term decline in global risk-free rates. The current dot plot estimates that the Fed Funds rate will stabilize between 3% and 3.5%, which means that over the next 24 months, the interest rate will fall by about 2%. However, this has nothing to do with Ethenas revenue source. In fact, it can be considered that this has a positive indirect trickle-down effect on funding rates (market up -> risk reward -> increased leverage demand -> higher funding rates).
When these factors come together, this powerful combination causes spreads to soar, which is the real value of Ethenas product.
When financing rates fall
Benchmark yield premium fell from around 10% to 2%
USDe supply is extremely sensitive to the yield spread of US Treasuries
Referring to the two charts above, it is clear that the market demand for USDe is extremely sensitive to the yield premium over US Treasuries. In the first six months of the elevated yield premium, USDe supply increased dramatically. As the premium decreased, demand for USDe naturally weakened. Based on this historical data, I am confident that once the yield premium returns, USDe growth will re-accelerate. Importantly, this tailwind is not only easily understood by most market participants, but also very attractive to them.
Over time, I expect this to significantly increase Ethena’s visibility in the market, just as Luna and UST dominated in 2021 when DeFi returns began to decline thanks to 20% of UST pledged in Anchor.
Catalyst 2: USTb
USTb was first launched two weeks ago and in my opinion, it is definitely a game changer that will greatly promote the popularity of USDe.
A brief overview of USTb is as follows:
Stablecoins 100% backed by BlackRock and Securitize;
Exactly the same functionality as other stablecoins that derive their yield from Treasury securities, without the additional custodian/counterparty risk;
It can become a subset of USDe, so that when traditional financial returns are greater than cryptocurrency returns, sUSDe holders can obtain treasury bill returns
The market doesn’t pay enough attention to this because after USTb was launched, assuming you feel comfortable that exchanges like Binance won’t go out of business (even if they do go out of business, USDe won’t go to zero because it’s fully collateralized by BTC and stETH), then there is no reason to hold other stablecoins in the crypto space besides USDe. At worst, you get a return similar to your competitors, and if not, you get a return proportional to the market’s risk appetite.
By integrating USTb into the backend, sUSDe’s yield volatility is now significantly smoothed, eliminating the biggest question mark regarding Ethena’s lack of sustainable yield in a bear market. Reducing yield volatility also increases the likelihood of future centralized exchange integration.
With these two catalysts, Ethena’s stablecoin is all-encompassing and now overwhelms all competitors in the market.
Token Economics: Advantages, Disadvantages, and Opportunities
One of the big downsides of VC coins is that if you hold your tokens long enough, you naturally become a source of exit liquidity for early investors, teams, and other stakeholders who are rewarded with tokens. Based on this alone, the market as a whole has completely abandoned the most PMF projects witnessed in the crypto space this cycle in favor of pure meme coins.
Ethena is no different than your average VC coin. ENA is down ~80% since the highs due to the high launch valuation and airdropped supply entering the market. In the past 6 months, the Season 1 airdrop has been fully unlocked and 750M tokens have been listed. These unlocks combined with the reduced demand for leverage ultimately shattered the ENA narrative and are the reason no one owns ENA today and why I strongly suspect the revaluation will be quite drastic.
So why should you consider this “evil” VC coin now? The answer is simple - over the next 6 months, the amount of ENA flowing into the market will decrease significantly, which will greatly ease the selling pressure. Yesterday, the first batch of tokens was released, and farmers only claimed $30 million out of a total of $125 million in new supply, choosing to lock up the rest of the tokens. Given that farmers have been marginal sellers over the past few months, what will happen when they stop selling? The price has found a natural bottom at $0.2 and is now forming highs and lows at $0.26.
The only additional inflation between now and April 2025 will come from the remaining ~300M farmer reward tokens entering the market, but at $0.28 this only unlocks ~$450K per day (less than 1% of daily volume). To put this into perspective, TAO is up 250% in the past month despite facing $4-5M per day of inflationary pressure. The point here is that inflationary unlocks are generally not significant in a token re-rating upward when conditions are right. After April 2025, teams/VCs will start unlocking tokens, so this gives us about 6 months to validate the above.
How big is your dream?
Despite being the only major new product with a clear PMF this cycle, ENA doesn’t even crack the top 100 on Coingecko. From a technical analysis perspective, ENA’s HFT chart looks extremely clear. Given the fundamental drivers and reduced inflationary pressures, I foresee ENA reclaiming the $1 level. Even so, ENA’s market cap is not as high as WIF’s, but only comparable to POPCAT’s recent peak of $1.5 billion in circulating market cap.
Looking ahead, Ethena has a solid foundation to scale USDe to billions and even tens of billions of dollars. As cryptocurrency stablecoins gain more market share for international cross-border payments, it is not impossible to eventually reach $1 trillion. By then, I would be surprised if ENA is not among the top 20 tokens, because ENA is the best product for the largest sector in the cryptocurrency market.
When we’ll get there is unknown, but Ethena is my bet on the next big dream in crypto this cycle.
As always, none of the above should be considered financial advice, please do your own research (DYOR).
I am certainly a long-term holder of this coin as well, but if subsequent data contradicts the above view, I may change my position.
