Analyzing Ethena from a Business Perspective: After a big dump of 80%, is the Rebound of ENA worth buying?

Introduction

Ethena is one of the few phenomenal DeFi projects in this cycle, with its token's circulating market cap once exceeding $2 billion after launch. However, since April of this year, its token price has rapidly fallen, with the circulating market cap retreating by more than 80% from its peak, and the token price retreating by as much as 87%.

Since entering September, Ethena has accelerated its collaboration with various projects, expanding the use cases for its stablecoin USDE. The scale of the stablecoin has also started to reach a bottom and rebound, with its circulating market value rebounding from a low of 400 million USD in September to around 1 billion USD currently.

In the article "Altcoins keep falling, it's time to refocus on DeFi" published in early July, Ethena was also mentioned, and the viewpoint at that time was:

"......Ethena's business model ( is a public fund focused on perpetual contract arbitrage ) that still has a significant ceiling. The large-scale expansion of its stablecoin ( reached a scale of 3.6 billion dollars ), which is based on secondary market users' willingness to pay high prices for its token ENA, providing high returns to USDE as a subsidy. This somewhat Ponzi-like design can easily lead to a negative spiral of business and token price when market sentiment is poor. The key point of Ethena's business transformation lies in whether USDE can one day truly become a stablecoin with a large number of 'natural holders'; thus, its business model will also complete the transition from a public arbitrage fund to a stablecoin operator."

Since then, the ENA price has continued to fall by 60%. Even though the price has rebounded nearly twice from the low point, there is still a gap of over 30% from the price at that time.

At this time, re-evaluating Ethena will focus on the following 3 issues:

1. Current business level: Ethena's current core business metrics, including scale, revenue, overall costs, and actual profit levels.
2. Future Business Outlook: The Promising Narrative and Future Development of Ethena
3. Valuation level: Is the current price of ENA in the undervalued hitting zone?

This article represents a preliminary thought as of the time of publication, which may change in the future, and the viewpoints presented are highly subjective. There may also be errors in facts, data, and reasoning logic. Critique and further discussion from peers and readers are welcome, but this article does not constitute any investment advice.

The following is the main text.

1. Business Level: The current core business situation of Ethena

1.1 Ethena's business model

Ethena positions itself as a synthetic dollar project with "native yield", meaning its track is in the same category as MakerDAO(, current SKY), Frax, crvUSD(, Curve's stablecoins), and GHO(, Aave's stablecoins)------stablecoins.

The business models of stablecoin projects in the crypto space are basically similar.

1. Raise funds, issue debt ( stablecoin ), expand the project's balance sheet.
2. Use the funds raised for financial operations to obtain financial gains.

When the revenue generated from the project's operating funds exceeds the total costs of fundraising and running the project, the project is profitable.

Taking the centralized stablecoin project ------ the issuer of USDT ------ Tether as an example, Tether raises US dollars from users and issues debt ( USDT ) certificates to users, and then invests the raised funds in interest-bearing assets such as government bonds and commercial paper to obtain financial returns. Considering the wide range of uses of USDT, which in the minds of users is valued the same as the US dollar, yet can achieve many things that traditional US dollars cannot do (, such as instantaneous cross-border transfers ), users are willing to provide Tether with US dollars in exchange for USDT without compensation, and when you want to redeem USDT from Tether, you also need to pay a certain redemption fee.

As a latecomer stablecoin project, Ethena is evidently at a disadvantage compared to established projects like USDT and DAI in terms of network effects and brand credibility. This is specifically reflected in its higher fundraising costs, as users are only willing to provide their assets to Ethena in exchange for USDE when there are high expected returns. Ethena's approach is to incentivize users by offering project tokens ENA, as well as raising funds through the revenue generated from the financial income of the project operation funds, which includes the stablecoin (.

) 1.2 Ethena's core business data

1.2.1 USDE issuance scale and distribution

After the issuance scale of USDE reached a new high of 3.61 billion in early July 2024, its scale continued to decline to 2.41 billion by mid-October, where it stopped falling and is currently gradually recovering, amounting to approximately 2.72 billion as of October 31.

Among the scale of over 2.72 billion, 64% of the USDE is in a staked state, and the corresponding APY is currently 13%### official data(.

It can be seen that the majority of users hold USDE for the purpose of obtaining financial income, with 13% being the "risk-free return" based on USDE, which is also the financial cost that Ethena is currently incurring to raise user funds.

At the same time, the yield on short-term U.S. Treasury bonds was 4.25%) as of October 24, (, the deposit rate for USDT on the largest DeFi lending platform Aave was 3.9%, while for USDC it was 4.64%.

We can see that Ethena is currently maintaining a relatively high fundraising cost in order to expand its fundraising scale.

USDE is not only issued on the Ethereum mainnet but also expanded on multiple L2 and L1 networks. Currently, the scale of USDE issued on other chains is 226 million, accounting for approximately 8.3% of the total.

In addition, a certain trading platform, as an investor and important partner of Ethena, not only supports USDE as margin for derivative trading, but also offers a yield of up to 20% on USDE stored on the platform, which has been reduced to a maximum of 10% in September ). Therefore, this platform is also one of the largest custodians of USDE, currently holding 263 million USDE, which peaked at over 400 million USDE during its peak period (.

![Business Analysis of Ethena: big dump of 80% followed by Rebound, is ENA worth buying?])https://img-cdn.gateio.im/webp-social/moments-faeedba303e898a7143bbf7e4854fd87.webp(

)# 1.2.2 Protocol Income and Underlying Asset Distribution

Ethena currently has three sources of protocol revenue:

1. The earnings from the staked ETH in the underlying assets;
2. The funding rates and basis income generated from derivatives hedging arbitrage;
3. Investment Returns: Hold in the form of stablecoins to earn deposit interest or incentive subsidies, such as placing USDC on a certain trading platform to obtain loyalty program (, with cash subsidies for USDC at an annualized rate of about 4.5% ) rewards; as well as sUSDS ### that existed in Spark, such as the former sDAI (, etc.

According to data approved by the Ethena official through Token terminal, Ethena's revenue has come out of last month's low in the past month, with October's protocol revenue being $10.63 million, a month-on-month increase of 84.5%.

Currently, a portion of the protocol income is allocated to USDE stakers, while another portion will enter the protocol's reserve fund )Reserve Fund(, to address expenditures when the funding rate is negative, as well as various risk events.

In the official documentation, it states that "the amount of protocol revenue used for the reserve fund must be decided through governance." However, no specific proposals regarding the distribution ratio of the reserve fund have been found in the official forum, and changes to the specific ratio have only been announced at the very beginning in their official blog. The actual situation is that the distribution ratio and logic of Ethena's protocol revenue have undergone multiple adjustments after launching. In the adjustment process, the officials initially listen to the community's opinions, but the specific distribution plan is still subjectively decided by the officials and has not gone through a formal governance process.

From the data of Token terminal, it can also be seen that Ethena's income has a very volatile division ratio between the revenue of USDE stakers ), i.e., cost of revenue (, and reserves.

In the early stage before the project's launch, when the protocol revenue was relatively high, most of the protocol revenue was allocated to the reserve fund. During the week of March 11, 86.7% of the protocol revenue was allocated to the reserve account. However, after entering April, as the price of ENA began to fall rapidly, the revenue from the ENA token was insufficient to stimulate the demand for USDE. To stabilize the scale of USDE, the distribution of Ethena protocol revenue began to tilt towards USDE stakers, with most of the revenue allocated to USDE staking users. It was not until the last two weeks that Ethena's weekly protocol revenue started to significantly exceed the expenditures allocated to USDE staking users ), excluding ENA token incentives (.

![Business Analysis of Ethena: big dump of 80% followed by Rebound, is ENA worth buying?])https://img-cdn.gateio.im/webp-social/moments-e9d7f133c906151194a98be043135e49.webp(

From the current underlying assets of Ethena, 52% are BTC arbitrage positions, 21% are ETH arbitrage positions, 11% are ETH staking asset arbitrage positions, and the remaining 16% are stablecoins. Therefore, Ethena's main source of income currently comes from BTC-dominated arbitrage positions, while the previously emphasized ETH Staking income has a small contribution ratio due to its low asset proportion.

From the perspective of the average return trend of BTC perpetual contract arbitrage, the average return rate for the fourth quarter so far has departed from the sluggish range of the third quarter, returning to the level of the second quarter of this year. Currently, the average annualized return rate for this quarter is over 8%. However, even during the sluggish market of the third quarter, the overall average annualized return rate for BTC arbitrage was also above 5%.

![Business Analysis of Ethena: big dump of 80% followed by Rebound, is ENA worth buying?])https://img-cdn.gateio.im/webp-social/moments-952275de00f3729931c3d50b2297435f.webp(

The annualized yield of ETH's perpetual contract arbitrage is overall similar to that of BTC and has currently returned to the 8%+ position.

![Business Analysis of Ethena: big dump of 80% followed by Rebound, is ENA worth buying?])https://img-cdn.gateio.im/webp-social/moments-30c59ac4ff15de2d16c1b215b1ab24e3.webp(

Let's take a look at the market contract size of Sol, which is about to be included as an underlying asset of Ethena. Even though the price of Sol has risen this year, resulting in a significant increase in contract positions, which has now reached 3.4 billion USD, there is still a large gap compared to ETH's 14 billion USD and BTC's 43 billion USD, and these figures do not include CME data ).

The funding cost of Sol, based on the largest trading platform by position volume, has a recent annualized funding rate similar to BTC and ETH, currently around 11%.

In other words, even if Sol is subsequently included as a contract arbitrage target for Ethena, its scale and yield do not show any significant advantage compared to BTC and ETH at the moment, and it cannot bring much incremental income in the short term.

(# 1.2.3 Ethena's protocol expenses and profit levels

Ethena's protocol expenses are divided into two categories:

1. Financial expenditure, paid through USDE, with the payee being the staker of USDE, and the source of income is from Ethena's protocol revenue ) derivative arbitrage and ETH staking, as well as stablecoin wealth management (.
2. Marketing expenses are paid through ENA tokens, targeting users who participate in various growth activities of Ethena )Campaign###. These users earn points by participating in activities (, and different stages of the Campaign have different point names, such as initially called Shards, later called Sats ). After each seasonal activity ends, users can exchange points for corresponding ENA token rewards.

Financial expenditures are relatively easy to understand. For users who stake USDE, they have a clear expectation of returns. The official website has clearly marked the current yield of USDE on the homepage:

The current yield for USDE staking is 13%.

The complexity lies in the continuous variety of marketing campaigns that Ethena has launched since the project went live. They have different rules, coupled with a points system that incentivizes specific user behaviors, and also introduces a weighting mechanism that involves comprehensive calculations across multiple partner platform activities.

Let us briefly review a series of growth activities following Ethena's launch:

1.Ethena Shard Campaign: Epoch 1-2(Season1)

• Time: 2024.2.19-4.1( in less than a month and a half )
• Main incentive action: Provide stablecoin liquidity for USDE on Curve