In the world of cryptocurrency, the Ethena (ENA) token, as an emerging asset, has gradually attracted the attention of investors and users. This article will delve into the advantages and risks of Ethena to help readers better understand the potential and challenges of this token.
Advantages of Ethena
Scalability: Ethena achieves scalability through the use of derivative commodities. This mechanism allows USDe (Ethena’s synthetic dollar) to scale with greater capital efficiency. Since pledged Ethereum (ETH) can be perfectly hedged by an equivalent short position, synthesizing USD only requires 1:1 collateral. This design not only improves the efficiency of the use of funds, but also provides users with greater flexibility.
Stability: Ethena hedges transferred assets immediately after issuance to ensure the stability of USDe. This mechanism ensures that the synthetic dollar value behind USDe remains stable under various market conditions. This is certainly an important advantage for investors looking for a safe haven in the volatile crypto market.
censorship resistance
Ethena provides censorship resistance by decoupling backing assets from the traditional banking system and storing trustless backing assets on-chain. This transparent and auditable programmatic custody account solution enables Ethena to operate in a decentralized liquidity venue, effectively resisting scrutiny and ensuring the security of users' assets.
Risks of Ethena: Although Ethena has many advantages, investors need to be cautious when participating and understand the risks.
Collateral Decoupling Risk: One of the main risks with Ethena is the mix of LST (Liquid Staked Token) collateral and regular Ethereum short positions. While this optimization of ETH basis trading helps the protocol maximize returns, it also increases risk. If Ethena’s LST collateral becomes decoupled from ETH, Ethena’s ETH shorts will be unable to capture the volatility, potentially causing the protocol to suffer paper losses.
For example, during the Three Arrows Capital (3AC) liquidation event in 2022, Lido’s stETH price fell significantly, close to 8%. The Shapella upgrade in April 2023 enabled Ethereum staking withdrawal functionality, further exacerbating this risk. If decoupling occurs again in the future, it will put pressure on Ethena's margin requirements, and Ethena may be forced to realize losses once the liquidation threshold is reached.
Financing interest rate risk
Although Ethena's yield may seem attractive in the early stages, multiple protocols have historically failed due to yield inversion. In order to combat negative financing returns, Ethena uses pledged ETH as collateral. This strategy reduced the number of days when USDe generated negative returns from 20.5% to 10.8% in three years of data backtesting. However, the natural state of the crypto market is to trade in contango, and funding rates may face upward pressure, which in turn affects Ethena's basis trading environment.
Counterparty Risk: Some people unfamiliar with Ethena’s design may consider deploying user collateral to centralized exchanges to be a major risk. However, Ethena uses OES (Order Execution Services) escrow accounts, which greatly mitigates this risk. Although unsettled hedging profits may result in losses, Ethena conducts profit and loss settlement on a daily basis to reduce capital risk to the exchange.
If one of Ethena's exchanges goes bankrupt, the protocol may need to leverage positions on other exchanges to maintain a neutral position for the portfolio. If the custodian of the OES account goes bankrupt, access to funds may be delayed, which may also require the use of leverage on other accounts for hedging.
General Crypto Risks: As with many early crypto protocols, depositors of Ethena face the risk that the protocol team may defraud users of their funds. The ownership of project keys has not yet been decentralized, and users need to be alert to this. In addition, although Ethena reduces the risk of hacking attacks through OES custody accounts, the potential vulnerabilities of smart contracts still require attention.
Summarize
As an emerging crypto asset, the Ethena (ENA) token has the advantages of scalability, stability, and censorship resistance. However, investors also need to be cautious when participating and pay attention to potential challenges such as collateral decoupling, financing rates, counterparties and general crypto risks. Understanding these advantages and disadvantages will help investors make more informed decisions and fully grasp Ethena's investment opportunities.
In the complex world of cryptocurrency, maintaining transparency and awareness of risks are keys to successful investing. I hope this article provides you with valuable insights and helps you take a step further in your Ethena investing journey.