Ethena Protocol Stable Coin.
Non-primary risks:
- regulatory (this is a security, does not pass bahamas test)
- technical risk (smart contract risk, custody risk, etc.):
- noteable that all their material references Lido's stETH (and doesn't include rETH, frETH, self-staked...), perhaps this is @dragonfly pumping their bags article
- this will, by definition, never be 0; so you have to swallow the pill if you want to play ball
1/ Some thoughts on @ethena_labs and $USDe, an attempt towards a stablecoin which is independent of the banking system.
2/ It's first worth noting the grand scale of this endeavor.
- Stablecoin market cap remains comfortably above $100 billion throughout the bear.
- Tether printed over $1 billion in profit last quarter.
- CBDCs are coming, from China to the WEF (both of which want censorship permissions).
This is a trillion dollar TAM.
"If you don't believe me or don't get it, I don't have time to try to convince you, sorry." INSERT VIDEO
3/ Delta-neutral ETH positions: MidBell Summary
User deposits $1. Ethena buys $1 of stETH and shorts $1 of ETH perps (on Binance, Bybit, etc.) using the stETH as cross-collateral.
- ETH goes up 10%, position worth $1.
- ETH goes down 5%, position still worth $1.
Okay, makes sense...
There's two primary/obvious risks to this design:
- Counterparty risk (token independent of banks, but dependent on CEXs)
- Basis risk (perp/spot inverts, position bleeds funding rate)
4/ Counterparty Risk
It looks like Ethena is mitigating this risk by not actually custodying assets with the exchanges on which they execute their perp shorts. Deposit the money in Fireblocks, Ledger, etc. and make special agreements with Binance, Bybit, Bitmex, etc. to accept this (likely some form of ZK-Proof of stETH asset claim) as collateral, and intermittently settle funding payments.
This doesn't exactly eliminate all counterparty risk (still an operational nightmare/panic if Binance goes FTX mode, look forward to hearing more from @ethena_labs on this), but funds are safu. Assuming CEXs agree to this setup, it looks sufficient to me.
5/ Basis Risk
This is the more interesting discussion. The question/issue is what happens when (not if) the perp-spot basis flips, and the delta-neutral position begins to bleed (rather than accrue) funding payments.
@leptokurtic gives the TLDR mitigation/assumptions here https://twitter.com/leptokurtic_/status/1682781081068769280?s=20
6/ One of @leptokurtic main responses here is that real-time transparency makes this a non-issue.
If Ethena (or any 3rd party service) provides a dashboard showing the live status of $USDe backing (stETH assets, short ETH.P liabilities, per-CEX funding rates/payments).
Then a basis inversion would cause (the rational reaction of) withdrawals/redemptions, which allow Ethena to undwind position, decreasing net perp shorts, thus bringing funding back to homeostasis (more on "homeostasis" shortly).
More to be said on this, but @leptokurtic is correct to note this mechanism is fundamentally distinct from the UST-like algostable ponzis. https://twitter.com/leptokurtic_/status/1682781083723796480?s=20
7/ Ethena's second (and third) mitigation to basis risk:
Historically, the funding rates, plus stETH yield, have been more than enough to cover periods of inverted funding (and they will have an insurance fund).
This is the part I find interesting. I'm not sure I'm convinced.
I'm a fan of Quantum mechanics, as well as Soros' reflexivity of markets. You cannot observe a system without changing it.
8/ Basis Risk: Homeostasis
Let's not forget the scale of the stablecoin market. As noted earlier, circulation exceeds $100 billion, and any resilient design should be prepared for this figure to grow by an order of magnitude (or two).
Aggregate ETH perp open interest across the top 10 centralized exchnages is ~$20 billion. CHECK FIGURE
If $USDe were to successfully capture just 5% of the stablecoin market, they will represent 5x CHECK FIGURE the current OI.
This all boils down to the following: Theoretically, where is homeostasis - the "natural state" of funding?
@leptokurtic seems quick to assume that equilibrium is contango. In my opinion, he is underestiimating Ethena's impact (theoretically, at scale) on futures markets.
(TODO)
- historical data only take you so far (ETH less than 10yo)
- preparing for the 2std event is LCTM's How2GoBroke