Revisiting Ethena: After an 80% drop, is ENA still undervalued in the hitting zone?

Author: Alex Xu, Mint Ventures

Ethena is one of the few phenomenal DeFi projects in this cycle. After its token launch, its circulating market cap once exceeded $2 billion (with a corresponding FDV of over $23 billion). However, since April this year, its token price has rapidly declined, with Ethena's circulating market cap retracting by more than 80% from its peak, and the token price dropping by as much as 87%.

Since 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 rebound from its low point in September, with its circulating market cap rising from $400 million to around $1 billion currently.

In an article I published in early July titled “Altcoins Keep Falling, It's Time to Refocus on DeFi” , I also mentioned Ethena. At that time, my view was:

"……Ethena's business model (a public fund focused on perpetual contract arbitrage) still has a clear ceiling. The large-scale expansion of its stablecoin (which had reached $3.6 billion at that time) relies on secondary market users being willing to buy its token ENA at a high price, providing high yield subsidies for USDE. This somewhat Ponzi-like design can easily lead to a negative spiral in business and token price when market sentiment is poor. The key point for Ethena's business turnaround lies in whether USDE can one day truly become a stablecoin with a large number of 'natural holders', thus completing its transformation from a public arbitrage fund to a stablecoin operator."

Since then, the price of ENA has continued to decline by 60%. Even though the current price has rebounded nearly twice from its low, it is still more than 30% below the price at that time.

At this point, I am reassessing Ethena and will focus on the following three questions:

1. Current business level: Ethena's core business metrics, including scale, revenue, overall costs, and actual profit levels.

2. Future business outlook: The narratives and future developments worth looking forward to for Ethena.

3. Valuation level: Is the current price of ENA in an undervalued zone?

This article represents my interim thoughts as of the time of publication, which may change in the future. The views expressed are highly subjective and may contain errors in facts, data, or reasoning logic. Criticism and further discussion from peers and readers are welcome, but this article does not constitute any investment advice.

Below is the main text.

1. Business Level: 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 lane as MakerDAO (now SKY), Frax, crvUSD (Curve's stablecoin), and GHO (Aave's stablecoin) — stablecoins.

In my view, the business models of current stablecoin projects in the crypto space are fundamentally similar:

1. Raise funds, issue debt (stablecoins), and expand the project's balance sheet.

2. Utilize the raised funds for financial operations to generate financial returns.

When the returns generated from the project's operational funds exceed the comprehensive costs incurred in raising funds and running the project, the project is profitable.

Taking the centralized stablecoin project — USDT's issuer — Tether as an example, Tether raises US dollars from users, issues debt (USDT) certificates to users, and then invests the raised funds in government bonds, commercial papers, and other interest-bearing assets to obtain financial returns. Considering the wide usage of USDT, its value in users' minds is equivalent to that of the US dollar, yet it can do many things that traditional dollars cannot (such as instant cross-border transfers). Therefore, 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 in the stablecoin space, Ethena is clearly at a disadvantage compared to established projects like USDT and DAI in terms of network effects and brand credibility, which is specifically reflected in its higher fundraising costs. Only when users have a high yield expectation are they willing to provide their assets to Ethena in exchange for USDE. Ethena's approach is to incentivize users with project tokens ENA and provide yields from stablecoins (derived from the financial income of project operational funds) to raise funds.

1.2 Core Business Data of Ethena

1.2.1 USDE Issuance Scale and Distribution

Data source: https://app.ethena.fi/dashboards/solvency

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

Among the scale of over $2.72 billion, 64% of USDE is currently staked, with a corresponding APY of 13% (according to official website data). Data source: https://dune.com/queries/3456058/5807898

This indicates that most users hold USDE to earn investment income, with 13% being the "risk-free yield" in USDE terms, which is also Ethena's current financial cost to raise user funds.

At the same time, the yield on short-term US Treasury bonds was 4.25% (data from October 24), while the deposit rate for USDT on the largest DeFi lending platform Aave was 3.9%, and USDC was 4.64%.

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

USDE is issued not only on the Ethereum mainnet but also expanded across multiple L2 and L1 networks. Currently, the scale of USDE issued on other chains is $226 million, accounting for about 8.3% of the total. Data source: https://dune.com/hashed_official/ethena

Additionally, Bybit, as an investor and important partner of Ethena, not only supports USDE as collateral for derivatives trading but also offers yields of up to 20% (reduced to a maximum of 10% in September) for USDE held on Bybit. Therefore, Bybit is also one of the largest custodians of USDE, currently holding $263 million in USDE (over $400 million at its peak). Data source: https://dune.com/hashed_official/ethena

1.2.2 Protocol Revenue and Underlying Asset Distribution

Ethena's current protocol revenue comes from three sources:

1. Returns from staked ETH in the underlying assets;

2. Funding rates and basis income generated from derivatives hedging arbitrage;

3. Investment income: holding in stablecoin form to earn deposit interest or incentive subsidies, such as holding USDC on Coinbase to receive loyalty program rewards (approximately 4.5% annualized) and holding sUSDS (formerly sDAI) in Spark.

According to data approved by Ethena's official sources from Token Terminal, Ethena's revenue has rebounded from last month's low, with October's protocol revenue at $10.63 million, a month-on-month increase of 84.5%. Data source: Tokenterminal, Ethena protocol revenue and revenue cost allocation to USDE

Currently, part of the protocol revenue is allocated to USDE stakers, while another part goes into the protocol's reserve fund to cover expenses when funding rates are negative and various risk events.

In the official documentation, it states that "the amount of protocol revenue used for the reserve fund must be decided by governance." However, I did not find any specific proposals regarding the reserve fund distribution ratio in the official forum, and changes in the specific ratio were only announced in the official blog at the beginning. The actual situation is that the distribution ratio and logic of Ethena's protocol revenue have undergone multiple adjustments after the launch, with the official initially listening to community opinions, but the specific distribution plan is still subjectively decided by the official without going through a formal governance process.

From the data in the above Token Terminal chart, it can also be seen that the distribution ratio of Ethena's revenue between USDE stakers (the red bars in the chart, i.e., cost of revenue) and the reserve fund has fluctuated significantly.

In the early stages of the project, when protocol revenue was relatively high, most of the protocol revenue was allocated to the reserve fund, with 86.7% of the protocol revenue allocated to the reserve fund account during the week of March 11. However, after entering April, as the price of ENA began to decline rapidly, the returns on the ENA token were insufficient to stimulate demand for USDE. To stabilize the scale of USDE, the allocation of Ethena's protocol revenue began to tilt towards USDE stakers, with most of the revenue distributed to USDE stakers. It wasn't until the last two weeks that Ethena's weekly protocol revenue began to significantly exceed the expenses allocated to USDE stakers (excluding ENA token incentives). Ethena's underlying asset situation, data source: https://app.ethena.fi/dashboards/transparency

Currently, from Ethena's underlying assets, 52% are BTC arbitrage positions, 21% are ETH arbitrage positions, 11% are ETH staking asset arbitrage positions, and the remaining 16% are stablecoins. Thus, Ethena's main source of income is BTC-based arbitrage positions, while the previously emphasized ETH staking income contributes very little due to its small asset proportion. Quarterly average yield of BTC and ETH perpetual contract arbitrage, data source: https://app.ethena.fi/dashboards/hedging

From the trend of the average yield of BTC perpetual contract arbitrage, the average yield for the fourth quarter so far has moved out of the low range of the third quarter and returned to the level of the second quarter this year, with the average annualized yield currently above 8%. Even during the sluggish market of the third quarter, the overall average annualized yield of BTC arbitrage was still above 5%.

The annualized yield of ETH perpetual contract arbitrage is also similar to BTC, currently returning to above 8%.

Now let's take a look at the market contract scale of Sol, which is about to be included in Ethena's underlying assets. Even with the rise in Sol's price this year, the contract holdings have significantly increased, currently reaching $3.4 billion, but there is still a large gap compared to ETH's $14 billion and BTC's $43 billion (not including CME data). SOL contract holdings trend, data source: Coinglass

From the perspective of funding rates, looking at the largest positions on Binance and Bybit, their recent annualized funding rates are similar to BTC and ETH, currently around 11%. Current annualized funding rates of mainstream cryptocurrencies
Data source: https://www.coinglass.com/zh/FundingRate

This means that even if Sol is subsequently included as a contract arbitrage target for Ethena, its scale and yield do not have a significant advantage compared to BTC and ETH, and it cannot bring much incremental income in the short term.

1.2.3 Ethena's Protocol Expenditure and Profit Level

Ethena's protocol expenditures are divided into two categories:

1. Financial expenditures, paid in USDE, to USDE stakers, with revenue sources being Ethena's protocol income (derivatives arbitrage, ETH staking, and stablecoin investment).

2. Marketing expenditures, paid in ENA tokens, to users participating in various growth activities (Campaigns) of Ethena. These users earn points through participation (different phases of Campaigns have different point names, such as Shards initially, later called Sats), and at the end of each seasonal activity, they can exchange points for corresponding ENA token rewards.

Financial expenditures are relatively straightforward. For users staking USDE, they have clear yield expectations, and the official website clearly states the current yield rate for USDE: Current yield rate for USDE staking is 13%, source: https://ethena.fi/

The complexity lies in the continuous various marketing Campaigns that Ethena has initiated since its launch, which have different rules, incentivizing specific user behaviors with points, and introducing a weighting mechanism that involves comprehensive calculations of activities across multiple partner platforms.

Let’s briefly review the series of growth activities Ethena has conducted since its launch:

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

Time: 2024.2.19-4.1 (less than one and a half months)

Main incentivized behavior: Providing stablecoin liquidity for USDE on Curve.

Secondary incentivized behavior: Minting USDE, holding sUSDE, depositing USDE and sUSDE into Pendle, holding USDE on various partner L2s.

Scale growth: During this period, the scale of USDE grew from less than $300 million to $1.3 billion.

Amount of ENA spent, i.e., marketing expenditure for the activity: a total of 750 million, accounting for 5%. Among them, the top 2,000 wallets can immediately claim 50% of their ENA, with the remaining 50% distributed linearly over the next six months. Smaller wallets have no unlocking restrictions. According to Dune dashboard data created by @sankin , nearly 500 million ENA was claimed between June, with the highest price of ENA before June being about $1.5 and the lowest about $0.67, averaging around $1; after early June, ENA began to rapidly decline from $1, dropping to around $0.2, with an average price of about $0.6, and the remaining 250 million ENA was mostly claimed during this period.

We can roughly estimate that the corresponding value of 750 million ENA = 51 + 2.50.6, approximately $650 million.

In other words, the scale of USDE grew by about $1 billion in less than two months, with corresponding marketing expenditures reaching $650 million, not including the financial expenditures paid for USDE.

Of course, as the first airdrop of ENA, this massive marketing expenditure during this phase is exceptional.

2. Ethena Sats Campaign: Season 2

Time: 2024.4.2-9.2 (5 months)

Main incentivized behavior: Locking ENA, providing liquidity for USDE, using USDE as collateral for loans, depositing USDE into Pendle, depositing USDE into Restaking protocols, and depositing USDE into Bybit.

Secondary incentivized behavior: Locking USDE on the official platform, holding and using USDE on partner L2s, and using sUSDE as collateral for loans, etc.

Scale growth: During this period, the scale of USDE grew from $1.3 billion to $2.8 billion.

Amount of ENA spent, i.e., marketing expenditure for the activity: Similar to the first season, the second season's rewards also total 5%, i.e., 750 million ENA (with the top 2,000 wallets facing the same 50% TGE and subsequent unlocking over six months). Based on the current price of ENA at $0.35, the value of 750 million ENA is approximately $260 million.

3. Ethena Sats Campaign: Season 3

Time: 2024.9.2 to 2025.3.23 (less than 7 months)

Main incentivized behavior: Locking ENA, holding USDE in officially designated partner protocols (mainly DEX and lending), and depositing USDE into Pendle.

Scale growth: As of now, despite the plans for the third season, the scale growth of USDE has encountered a bottleneck, with the current scale of USDE at approximately $2.7 billion, slightly down from the $2.8 billion at the start of the third season.

Amount of ENA spent: Considering that the third season lasts nearly 7 months, longer than the second season, and that the ENA reward incentives are likely to continue decreasing, the total incentive amount for ENA in the third season is still likely to remain at 5%, i.e., 750 million.

Thus, we can roughly calculate the total expenditures of Ethena's protocol from its launch until now (October 31):

Financial expenditures (paid to USDE stakers in stablecoin): $81.647 million.

Marketing expenditures (paid to users participating in activities in ENA tokens): $650 million + $260 million = $910 million (this does not yet include potential expenditures after September). Trends in Ethena's quarterly protocol revenue and financial expenditures, source: tokenterminal

Meanwhile, the total protocol revenue during the same period is: $124 million.

In other words, contrary to the common perception that "Ethena is very profitable," Ethena's income, after deducting financial and marketing expenditures, has resulted in a net loss of $868 million by the end of October this year. This does not yet account for ENA token expenditures from September to October, so the actual loss may be even higher.

An $868 million net loss is the price of achieving a market cap of $2.7 billion for USDE within a year.

In fact, like many DeFi projects in the last cycle, Ethena is following the path of raising core business metrics and increasing protocol revenue through token subsidies. However, Ethena has adopted a unique points system in this cycle, delaying the issuance of tokens and involving more partners as participation channels, making it difficult for participating users to intuitively assess their ultimate financial returns from participating in Ethena activities, which in a sense enhances user stickiness.

2. Future Business Outlook: Narratives and Future Developments Worth Looking Forward to for Ethena

In the past two months, ENA has rebounded nearly 100% from its low, even with the rewards for Season 2 opening in early October. These two months have also been filled with news and positive developments for Ethena, such as:

October 28: On-chain options and perpetual contract project Derive (formerly Lyra) included sUSDE as collateral.

October 25: USDE was included as collateral for OTC trading by Wintermute.

October 17: Ethena initiated a proposal to "integrate Ethena's liquidity and hedging engine into Hyperliquid."

October 14: The Ethena community proposed to include SOL as part of USDE's underlying assets.

September 30: The first project in the Ethena ecosystem launched, the derivatives exchange Ethereal, promising a 15% token airdrop to ENA users. Subsequently, Ethena Network announced that more information about product launch timelines and new ecosystem applications based on USDE would be released in the coming weeks.

September 26: Plans to launch USTB — the so-called "new stablecoin launched in cooperation with BlackRock," which is actually a stablecoin backed by the on-chain treasury token BUILD issued by BlackRock, with limited direct relationship to BlackRock.

September 4: In collaboration with Etherfi and Eigenlayer, the first stablecoin AVS collateral asset — eUSD was launched, which can be obtained by depositing USDE into etherfi, with eUSD going live on September 25.

It can be said that in these two months, the scenarios for USDE and sUSDE have increased significantly, although the demand stimulation for USDE may not be obvious, such as the stablecoin AVS collateral asset eUSD launched in collaboration with Etherfi and Eigenlayer, which currently has a scale of only a few million.

In fact, what truly drove the recent surge in ENA's price was the well-known trader and crypto KOL Eugene @0xENAS publishing a strong endorsement article for Ethena on October 12: “Ethena: The Trillion Dollar Crypto Opportunity” .

This article, which garnered nearly 400 shares, over 1,800 likes, and over 700,000 views, caused ENA's price to rise from $0.27 to $0.41 in four days, an increase of over 50%.

In the article, Eugene emphasized three reasons for his endorsement of Ethena, but in my view, aside from the first reason, the remaining two reasons are full of flaws:

1. The U.S. interest rate cut leads to a decline in global risk-free rates, making USDE's APY appear more attractive, attracting more capital inflow.

2. The newly launched USTB stablecoin "in cooperation with BlackRock" is an "absolute gamechanger," which will significantly increase the adoption of USDE, as USDE can switch its underlying assets to USTB to obtain risk-free returns from treasury bonds when the market's perpetual arbitrage yields are negative.

Flaw: USTB is backed by BUILD, which does not mean that USTB is a stablecoin jointly launched by BlackRock and Ethena, just as Dai has a large amount of USDC as its underlying asset but is not a stablecoin jointly launched by Circle and MakerDAO. In fact, to obtain treasury bond returns during periods of negative perpetual yields, USDE can directly close positions and allocate to Build or sDAI, or exchange for USDC to hold on Coinbase to earn a 4.5% annualized subsidy, without the need to issue another USTB for holding. USTB seems more like a gimmick product to ride on BlackRock's traffic, and calling such a mediocre product an "absolute gamechanger" raises doubts about the author's understanding or writing motives.

1. The future emission rate of ENA will decrease, reducing the selling pressure compared to before.

Flaw: In reality, the rewards for Season 2 still have a total of 5% ENA, meaning 750 million tokens will enter circulation over the next six months, which is not significantly less than the total incentives of the previous season. Moreover, in March next year, ENA will face a massive unlocking for the team and investors, and the inflation expectations for ENA in the next six months are not optimistic.

However, there are still stories worth looking forward to for Ethena in the coming months to a year.

First, with the rising expectations of Trump's return to power and the Republican victory (results will be seen in a few days), the warming of the crypto market will benefit the perpetual arbitrage yields and scales of BTC and ETH, increasing Ethena's protocol revenue.

Second, more projects may emerge within the Ethena ecosystem after Ethereal, increasing ENA's airdrop income.

Third, the launch of Ethena's self-operated public chain can also bring attention and nominal scenarios such as staking to ENA, but I expect this to be launched after more projects accumulate in the second point.

However, for Ethena, the most important thing is for USDE to be accepted as collateral and trading assets by more leading CEXs.

Among the leading exchanges, Bybit has already established deep cooperation with Ethena.

Coinbase has its own USDC to operate, and considering the complexity of regulation as a U.S. domestic enterprise, the possibility of supporting USDE as collateral and stablecoin trading pairs is virtually zero.

As for Binance and OKX, the possibility of OKX including USDE as a stablecoin trading pair and collateral does exist, as it participated in two rounds of Ethena's financing, aligning financial interests to some extent. However, this possibility is not very high, as this move would also expose OKX to operational and endorsement risks related to Ethena; compared to OKX, Binance, which only participated in one round of Ethena's investment, has an even lower likelihood of including USDE as a stablecoin trading pair and collateral, especially since Binance itself has its own supported stablecoin project.

The belief that USDE will become a collateral asset for contracts on major exchanges is also one of the reasons Eugene is optimistic about Ethena, but I am not very optimistic about this.

3. Valuation Level: Is the Current Price of ENA in an Undervalued Zone?

We will analyze the current valuation situation of ENA from both qualitative analysis and quantitative comparison dimensions.

3.1 Qualitative Analysis

Events that are favorable for the price of ENA tokens in the coming months and have a high likelihood of occurring include:

• The rise in arbitrage yields brought about by the warming of the crypto market, reflected in improved expectations for protocol revenue, leading to an increase in ENA prices and promoting the growth of USDE scale.
• Including SOL as an underlying asset can attract the attention of SOL ecosystem investors and project parties.
• More projects similar to Ethereal may emerge within the Ethena ecosystem in the coming months, bringing more airdrop income to ENA.
• Before the next wave of ENA unlocks, the project team has an incentive to raise the token price, both to promote an upward spiral in business and token price and to provide themselves with a higher exit price.

Additionally, from Ethena's performance over the past six months, the Ethena project team has demonstrated strong business capabilities, arguably performing the best in external cooperation expansion among many stablecoin projects, even more aggressively and efficiently than the leading stablecoin project MakerDAO.

Currently, factors that are unfavorable to the value of ENA tokens and suppress ENA prices include:

• ENA lacks real monetary profit distribution, relying more on somewhat abstract staking scenarios (such as using AVS assets to ensure Ethena's multi-chain security) and self-mining.
• The actual profitability of the Ethena project is poor, with massive subsidies implemented to open up the market, leading to significant net losses for the project, which are ultimately borne by ENA token holders.
• ENA still faces significant inflation pressure in the next six months, stemming from ENA token expenditures in marketing activities and the massive unlocking for core teams and investors in late March next year. According to Tokenomist data, ENA tokens face an inflation pressure of 85.4% of the current circulating supply over the next six months.

Data source: https://tokenomist.ai/

3.2 Quantitative Comparison

Ethena's business model is essentially no different from other stablecoin projects; its innovation lies in the use of raised assets to profit through perpetual contract arbitrage.

Therefore, we will use MakerDAO (now SKY), the largest stablecoin project by circulating market cap, as a benchmark for valuation comparison.

It can be seen that compared to the established protocol MakerDAO, Ethena's token ENA currently does not offer cost-effectiveness in terms of protocol revenue or profit.

Conclusion

Although many people regard Ethena as a highly representative innovative project in this cycle, its core business model is no different from other stablecoin projects, all of which raise funds for financial operations to profit and strive to promote the usage scenarios and acceptance of their bonds (stablecoins) to minimize their fundraising costs.

At the current stage, Ethena, which is still in the early stages of stablecoin promotion, remains in a phase of significant losses and is not as "very profitable" as many KOLs claim. Its valuation is not undervalued compared to the representative stablecoin project MakerDAO.

However, as a new player in this space, Ethena has demonstrated very strong business development capabilities, being more aggressive than other projects. Like many DeFi projects in the last cycle, rapid scale expansion and more project adoption will enhance investors' and researchers' optimistic expectations for the project, thereby driving up the token price, which will lead to higher APY and further increase the scale of USDE, creating a self-reinforcing upward spiral.

Eventually, such projects will face a critical point where people begin to realize that the project's growth is driven by token subsidies, and the price increase of newly issued tokens seems to be supported only by optimistic sentiment, lacking a link to value.

Thus, a fast-paced game begins.

Ultimately, only a few projects can rise from such a downward spiral. The star stablecoin of the last cycle, Luna (UST issuer), has already been buried, Frax's business has significantly shrunk, and Fei has ceased operations.

As a product with a clear Lindy effect (the longer it exists, the stronger its vitality), Ethena and its USDE still need more time to validate the stability of its product architecture and its survival capability after subsidies decline.