Two types of Stablecoins are boring and exciting. Bored is for now. It’s better for publishers like Circle and Tether to compete with banks and merchants who have spent the last year or two to make sure Stablecoins sound as boring as possible and planed Stablecoins are very boring.
Meanwhile, there is this:
Ecena allows for the creation and redemption of delta neutral synthetic dollars, USDEs and cryptographic first fully supported, on-chain, scalable, and censor-resistant money.
With a mechanism supporting USDE, Susde is the first “internet money” to provide assets that represent cryptocurrency rewards, derived from liquid assets’ compensation (where it is utilized for support), allowing for the spread of capital and foundations available in the perpetual and futures markets.
The USDE is fully supported (it is subject to discussion in the Risks section regarding events that could lead to the loss of backing) and is freely configurable across CEFI & defi.
look? exciting!
Due to the circular token value, Ecena is the third largest stubcoin issuer in the world. That big idea is a yield token that is locked in the dollar, while Tradfi avoids contact with contaminated “safe” assets like the Treasury. That’s all the throwback about Crypto breaking the bonds of financial repression, rather than building regulatory approved railways for payment and remittance.
Esena has an on-site expert who makes the mechanism seem very complicated…
©Ethana©
. . . But underneath it all was a rather simple deal. It brings together long spots, short futures, and differences.
The main ingredient in USDE is the eternal future. Invented by Robert Shiller in 1993 and introduced to Crypto by Bitmex Exchange in 2016, Perpetual Futures leveraged exposure to assets via a single standardized contract, without the hassle of direct ownership or contract rollover.
Crypto went crazy for Perps. The expiry derivative is uniquely suited to Crypto’s 24/7 volatility and love for 100/1 leverage. They are huge products for vinance, the heart of the business of FTX before collapse, trialled by Coinbase in the US and are classified as an unregulated instrument.
PARP matches buyers directly with sellers. There is no need to transfer cash, and there is no need to ruin the blockchain. The only upfront cost is the Exchange margin requirements. As long as both parties want to continue playing, profits and losses will be marked in the market.
However, during the live trade, both parties agree to pay a continuing fee proportional to the gap between the futures price and the price of the underlying asset known as the basis. Whenever the basis is positive, the buyer pays the seller. If it’s negative, vice versa.
The fee, known as the funding rate, is designed to attract arbitrators who keep prices down on spots and futures. However, Crypto Traders have been satisfied in recent years with paying a premium for long exposures in exchanges, so the funding rate is sustainably positive, and the contract is similar to a license to print money.
The easiest transaction in the world was to buy crypto, buy hedge exposures by shortening perp and collect funding rates. This is very similar to FX carry trade, but the funds replace the difference in interest rates between the two countries.
This is what lies behind Ecena’s stubcoin reserve. There are many things on the yield and liquidity management website, but everything that underpins it was an old-fashioned basic transaction. As of January, 92% of protocol revenues were derived from “financement and basic spreading acquired from Delta Hedged Derivative positions.”
Is this nuts? Will it crash?
According to Brian Routledge, associate professor of finance at Carnegie Mellon University: That’s not necessarily the case. That’s not necessarily the case.
Routledge is the lead author of Crypto Carry Trade and a 2022 paper, initially highlighting permanent future arbitrage opportunities. As long as the degree to which Crypto is hunger for leverage exceeds the renter, he told us:
Imagine there are a lot of people who want to be longer and a lot of people who want to be shorter. Typically, that setting will adjust the price to be balanced. Permanent contracts are designed to have a fixed price. It should be pinned to the Bitcoin spot price index. Here, the way demand (and supply) is equated with funding rates. It adjusts to create a rate that will clarify the market. Empirically, we observe that this funding rate tends to be positive. This means there is more demand in the long term.
It’s not stupid to think that it will continue. Funding rates are (empirically) permanent. But it’s not magic. There are negative periods. As an analogy, this can be seen in other carry transactions such as goods and foreign currency.
As with all carry transactions, the greater risk is busy. As more arbitrators enter the market on the short side, the funding rate will compete to zero.
As the future yields of USDE show, this has already happened to some extent. This time, last year it was over 60% per year. By the turn of this year, it reached 27%. By March it was just above 10% and then halved again.
It should be noted here that “yield” is not the traditional sense, but rather the cryptographic meaning. A person exchanges dollars for synthetic dollars and exchanges this synthetic dollars for virtual bottle caps. Bottle caps are aimed at owners to reduce income paid each week with bottle caps. Those who need to regain the dollar must first swap the bottle cap into synthetic dollars. This will take seven days. There is then a redemption process that promises to return the proportional share of the coin up to one dollar. Redemption limits are “dynamically” adjusted based on market conditions and the level of customer KYC/AML clearance.
All of this ligmal rolls may have seemed worthy for the promise of APY over 60%. Earning less than 5% Apy is not very appealing. This probably explains why Ethena’s recent growth has stagnated.
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It should also be noted that the chart above does not include USDTB from Ethena, an Alt-Stablecoin that provides spare assistance using the BlackRock Money-Market Fund. Tradfi still seems to have uses.
For USDE. The Ethena website lists seven risk factors: Perhaps the most eye-catching thing is the risk of the other person. The company says it protects against FTX-style events by using “payment providers in exchange” rather than exchanges, but even if it proves accurate, that’s a half-way solution.
Next is “backing asset risk.” Like Crypto Basion Trade, Ethena’s earns revenue from so-called liquid staking tokens. These are virtual bottle caps that represent ciphers locked in boxes that qualify for network maintenance fees.
Lockbox is essential in the stake verification process for Ethereum proofs, replacing the environmental disasters, a Bitcoin job proof system. Bottle caps (the most popular types are called Steth and Meth in case you don’t mind) allow holders to continue trading locked coins.
Ecena can charge network fees without worrying about ether prices rising or falling by purchasing bottle caps while keeping the underlying token shorter. It’s vaguely similar to a crypto-based transaction, but requires proactive management as there is much less certainty that long shorts will move in lockstep. If they are depeg, the hedge will explode.
Ether Liquid staining tokens are only 5% of the spare backing per Ethena dashboard. That may not sound much, but when the base transaction returns go to zero and the capital buffer quoted is at just 1.18%, that’s still quite a lot.
The story of high yields and staking income may remind readers of Terra, where a $50 billion algorithmic stable collapsed over the three days of 2022. The comparison may not be completely fair. The long demand for leveraged DRIP is genuine, so it adds value by raising capital to supply Ecena, says Routledge, who calls it a “interesting example of financial intermediation.”
The big risk is that market sentiment is sour and refracting funding rates from positive to negative. Maintaining the carry trade will be a cost. “So, if the funds are negative for a long time, the stability of the coin may not be viable,” says Routledge.
And it may be worth highlighting that the launch of Ethena came after the FTX liquidation and the subsequent crypto winter. It has not yet had an interesting time.
Arthur Hayes, co-founder of Bitmex and a Pre-release advisor We seeded Ecena with an idea in March 2023 in a blog post about futures-backed synthetic stubcoins. He wrote the post while in his home detention after pleading guilty to violating US bank secret laws, which allegedly runs Bitmex like a “money laundering platform.”
Hayes has not mentioned either since January, but often uses it using X accounts to promote both the token and the developer. He was reported in December that he sold nearly half of the shares tied to Ethena Protocol, a free-floating token known as the ENA, for a profit of $7.7 million.
Fuck your 4.7% and bet usde (@ethena_labs) 29% offer. Don’t be stupid stupid… https://t.co/kwzwiuh68l
– Arthur Hayes (@cryptohayes) November 20, 2024
The ENA token then lost about 80% of its value.
The Trump administration allowed Hayes in March.
Whatever Esena or whatever it is, it’s unlikely to get bored.
