Charles Edwards, the founding father of Capriole Investments, has sparked vital curiosity and debate inside the cryptocurrency group. He heralded Ethena (ENA) as “the Luna of this cycle,” however with an important distinction: its financial fundamentals are deemed sustainable.

Edwards elaborated, “It’s 100% collateralized and the yield is variable primarily based on market forces. Two issues Luna wasn’t.” He additionally famous that at its zenith, Luna’s valuation exceeded ENA’s present market cap by greater than twenty-fold, but he cautioned, “ENA will not be risk-free, custody and execution danger exist.”

Ethena is the Luna of this cycle, besides the underlying economics are literally sustainable. It is 100% collateralized and the yield is variable primarily based on market forces. Two issues Luna wasn’t. At it is peak LUNA was over 20X greater than what ENA is now. ENA will not be danger free, custody…

— Charles Edwards (@caprioleio) April 10, 2024

Since its launch on April 2, ENA has seen a meteoric rise from underneath $0.30 to a excessive of $1.45. This rally is basically attributed to Ethena Labs’ strategic enhancement of its rewards program, now in its “Season 2,” which presents a 50% reward increase for customers locking their ENA tokens for at the very least seven days. This transfer goals to bolster consumer engagement and loyalty, fostering a sustainable ecosystem for the Ethena platform.

A exceptional facet of this ecosystem is the fast development of its stablecoin, USDe, which has outstripped the provision development of established counterparts akin to USDT, USDC, and DAI, reaching a $2 billion provide in simply over 100 days.

USDe is the quickest rising USD denominated asset within the historical past of crypto pic.twitter.com/xgiRJjf96t

— G | Ethena (@leptokurtic_) April 8, 2024

Nevertheless, the venture’s excessive yields that are generated by harnessing the spinoff markets and staked Ethereum have stirred skepticism amongst trade specialists. Fantom founder Andre Cronje, amongst others, has raised issues concerning the sustainability of those yields, that are the best in your entire crypto trade.

Dangers Concerned With Ethena

Noteworthy, ENA is usually in comparison with Terra Luna (LUNA), however the variations couldn’t be a lot greater, as Edwards additionally famous. Whereas ENA will not be danger free, a demise just like the one in every of LUNA is very unlikely. Regardless of that, traders want to concentrate on different dangers concerned with ENA.

Diving deeper into the dialogue of dangers, CL (@CL207) from eGirl Capital presents an intriguing perspective on the habits of derivatives merchants. She clarifies, “It seems Ethena is making many individuals who don’t commerce derivatives have a extremely laborious time wrapping their heads round the truth that derivatives merchants are so genuinely retarded that we’re prepared to pay like 50%+ APR to enter a place.”

Notably, final cycle crypto merchants had been bidding futures so excessive that Bitcoin quarterlies earned “a locked-in >50% apr. She added, “simply 50 days into 2021, we collectively paid 2,400,000,000$ in funding charges by the tip of 2021, the market has paid as a lot as a decently sized nation’s GDP.”

Monetsupply.eth (@MonetSupply) from Block Analitica supplies a granular evaluation of the dangers Andre Cronje highlighted. By means of his examination, a number of key areas of concern are outlined:

• Oracle Danger: The potential influence on trade positions on account of Ethena offering inaccurate quotes on minting or redeeming operations. Nevertheless, MonetSupply notes, “there’s fee limits on this tho so max loss is constrained and counterparties are all whitelisted (can’t simply run away with the cash).”
• Liquidation Danger: Deemed not a big issue because the portfolio is leveraged lower than 1x, suggesting a conservative method to borrowing and leverage.
• Unfold Danger: The potential for elevated foundation resulting in greater funding income, which ought to theoretically entice inflows. Conversely, a destructive foundation may trigger outflows, however Ethena may gain advantage from closing hedged positions profitably.
• Collateral Ratio Danger: Regardless that liquid staking tokens (LSTs) are given lower than 100% weight on centralized exchanges (CEX), the general low leverage mitigates this danger. The proportion of LST in spot collateral is comparatively minor.
• Custody Danger: Highlighted as one of many extra vital issues, given the reliance on custodians with a superb observe file and the distribution of belongings throughout a number of entities.
• Alternate Solvency Danger: This danger may result in the lack of unsettled revenue and loss (PnL) and a few buying and selling prices to rehedge on different exchanges. Nevertheless, MonetSupply provides, “the Binance/ceffu nexus may change this evaluation although, are they really unbiased?”
• Ethena Entity Danger: The inner danger associated to Ethena’s keys or authentication tokens being compromised, or a staff member appearing maliciously.

MonetSupply concludes that regardless of these dangers, the framework of overcollateralization on platforms like Morpho, the Maker surplus buffer, and the MKR backstop, supported by a considerable Proof of Liquidity (POL), serves as a sturdy mitigating issue.

At press time, ENA traded at $1.329.

Featured picture from Bitget, chart from TradingView.com

Disclaimer: The article is offered for academic functions solely. It doesn’t characterize the opinions of NewsBTC on whether or not to purchase, promote or maintain any investments and naturally investing carries dangers. You might be suggested to conduct your individual analysis earlier than making any funding selections. Use data offered on this web site totally at your individual danger.