Ethena updates token economics, forcing airdrop users to become long-term Hodlers?

Author: Yangz, Techub News

On June 18, Ethena updated its tokenomics, planning to introduce a universal re-staking mechanism in the Ethena ecosystem and the upcoming Ethena Chain, and to implement a "locking" requirement for any users who receive ENA through airdrops. Although Ethena claims this move aims to reduce the inflation rate of ENA and incentivize ENA holders to become long-term users, considering that the Ethena team has previously changed the unlocking mechanism for airdropped tokens in the Shard Campaign multiple times, the "coercive" implication of this update is very apparent. Some users have pointed out that these repeated mechanism changes by Ethena are merely to ensure that ENA cannot be sold before the team and investors unlock their tokens; however, even if it is to maintain the value of ENA, this approach is disheartening for users.

Current Use Cases of ENA in the Ethena Ecosystem

Currently, the use cases of ENA in the Ethena ecosystem include:

i) Locking ENA in Ethena to enhance potential future returns. The purpose of this is to encourage the transfer of value from more mercenary capital to users who are more beneficial for the long-term development of Ethena. The scale of this redistribution is linearly related to the amount of USDe held by users. Therefore, as the supply of USDe increases, the potential demand for ENA holding from long-term consistent ecosystem members will also grow. Currently, the locking pool holds approximately 290 million ENA.

ii) Locking ENA in Pendle Finance PT-ENA, where users can earn a fixed annual interest rate of about 75% in the form of PT-ENA. YT-ENA purchasers can receive point distributions and only need to hold 1 YT = 1 ENA to meet the minimum ENA holding requirement relative to their USDe holdings. Currently, the PT-ENA pool holds about 160 million ENA.

iii) The next phase of incorporating ENA into the Ethena system and increasing its utility will utilize a universal re-staking pool to stake ENA. The first use case relies on a LayerZero DVN-based messaging system to provide economic security for cross-chain transfers of USDe. This is the first layer in a multi-layer infrastructure related to the upcoming Ethena Chain and financial applications built on that chain, which will leverage and benefit from the re-staking ENA module.

For more detailed information about the chain, refer to the detailed Ethena 2024 roadmap post.

Currently staked ENA and sUSDe will become the first new assets that can be deposited into Symbiotic, with the initial LST reaching its cap within hours.

Current data on locked ENA can be viewed through the Dune dashboard.

Details of the ENA Re-staking Module

Ethena will first collaborate with Symbiotic and LayerZero to pilot the use of a universal re-staking framework to ensure the cross-chain transfer security of Ethena-based assets (including USDe and sUSDe). These transfers are verified through the LayerZero DVN network, which ensures security through ENA staked within Symbiotic.

This module will also establish a universal framework to launch re-staked DVNs for LayerZero ecosystem partners, utilizing staked tokens to provide economic security and operator choice for DVNs.

For more detailed information about LayerZero DVN, please refer to the relevant documentation.

While cross-chain transfers based on Ethena will be secured through staked ENA, Ethena will provide a unique value proposition for universal re-staking use cases through USDe and sUSDe, serving as underlying assets for other systems and protocols.

Compared to using Ethereum as the underlying re-staking asset, USDe/sUSDe as assets have two distinct characteristics that unlock unique potential use cases:

i) Non-correlation: Stable assets "pegged" to the dollar are generally uncorrelated with volatile crypto assets. The stability of the dollar relative to Ethereum is an important characteristic during times of stress—when we most need the security of re-staking.

ii) Sustainable real returns: It is still unclear how AVS can provide a truly non-inflationary yield for billions of dollars in re-staking capital without offering excessive token rewards that constitute the bulk of returns. Since its inception, the real yield of USDe has structurally exceeded that of any dollar-based asset, making the use of USDe uniquely capable of addressing this issue, as it reduces the need for inflationary rewards and narrows the capital cost gap between re-stakers and systems consuming security.

Reward Details for Staking ENA in Symbiotic

Following the ETH LST in Symbiotic reaching its cap within days, ENA and sUSDe will become the next eligible assets for staking in its next phase.

Staking ENA in Symbiotic will earn the following rewards:

• Up to 30x daily points reward per ENA

• Symbiotic points

• Mellow points

• Potential future LayerZero RFP allocations (if allocated to Ethena)

The ENA pool will go live on June 26 (next Wednesday).

Staking ENA in Ethena Chain

As detailed in the 2024 roadmap, Ethena Chain will focus on building financial applications and infrastructure based on USDe as the native gas token and pivot asset within the system.

We believe that crypto-native currencies are the holy grail and killer applications, while the dollar is the lifeblood of every financial application.

The revamped ENA will provide universal security for each use case of the following applications:

• Spot AMM

• Perpetual DEX

• Yield trading

• Money markets

• Low-collateral lending

• On-chain prime brokerage

• Options and structured products

As well as on-chain infrastructure solutions such as:

• Cross-chain transfers

• Oracle providers

• Shared sequencers

• Data availability solutions

In return, users may qualify to benefit from potential airdrops from these protocols.

As the ecosystem and use cases around USDe assets grow, the utility of ENA as an asset that helps ensure ecosystem security will also increase.

Update on ENA Locking and Attribution

Starting June 17, any user who receives ENA through airdrops (e.g., from the airdrop portion of the Shard activity subject to attribution conditions) must choose one of the three options outlined in the first part, locking at least 50% of the claimable ENA allocation.

Otherwise, all unallocated ENA belonging to the relevant wallet will be reallocated to other users who lock ENA. As more use cases for ENA emerge in the ecosystem, options for locking ENA for this purpose will also increase.

It should be clarified that the purpose of the above provisions is to incentivize ENA holders to shift from mercenary capital to long-term cooperative users.

Clarifications regarding the above will be made on June 23 when users claim their next week's ENA attribution. From that point on, at least 50% of the newly attributed ENA must be locked in the options mentioned above; otherwise, users will lose their unallocated ENA.

The foundation, team, or investors will not retain any unallocated ENA that does not meet the above conditions; this ENA will be fully used to benefit users aligned with the ecosystem.

Different Perspectives on Ethena's Update

Regarding Ethena's update, Ignas expressed appreciation for its integration with Symbiotic, stating that Ethena, as the most important AVS, will enable Symbiotic to surpass Eigenlayer. Furthermore, this update "also marks a change in the tokenomics paradigm: now, every DeFi token can be strengthened through the security of re-staking." Ignas noted, "This also means that DAO tokens like lrtENA become possible; perhaps Maker should also launch with lrtMKT as an AVS, or even lrtUNI."

Kairos Research commented that "this is a very interesting initiative."

Kairos Research stated that since its launch in early April, a significant portion of ENA has been locked in the protocol's own LP staking contracts and Pendle contracts, accounting for about 3% of the total supply, or 28% of the current circulating supply. According to on-chain data, the Ethena LP staking contract previously experienced only one large outflow of ENA, totaling about 23 million ENA flowing to a specific wallet, which was then sent to a Binance deposit address. This indirectly indicates user long-term support for the protocol. With this update to ENA, additional staking channels will also be created. Considering that the points reward multiplier will remain the same, and Ethena seems to imply that it will provide additional airdrops for future ecosystem projects, it can be imagined that when new re-staking contracts go live, some of the tokens will migrate from the aforementioned contracts to the new re-staking contracts.

However, Kairos Research also raised its concerns about this update. They stated that while the concept of "real yield" from Symbiotic AVS is cool, and Ethena's vertical integration with it makes sense, whether re-staking an unstable governance token is the best solution for "security" remains uncertain. Additionally, while the tokenization of cash and arbitrage trading helps users access types of yields they otherwise could not, there is still counterparty risk involved, introducing a layer of opacity to an otherwise transparent protocol. Given that these counterparties are responsible for providing yield, before establishing an entire ecosystem around the enticing yields offered by the Ethena protocol, Kairos Research recommends that Ethena enhance transparency and better assess risks surrounding the protocol.

Of course, aside from Kairos Research's more holistic and objective evaluation, there has been more criticism on CT regarding Ethena's mechanism of "forcing" airdrop recipients to lock their tokens. @DarkCryptoLord directly mocked in the comments, "Is ENA for governance? Before this, I’m not sure I’ve seen any voting proposals regarding this update. Our earned ENA has changed from monthly unlocking to weekly unlocking overnight, and now we are forced to lock 50%. What’s the point of a governance token?" Additionally, some KOLs expressed disappointment with Ethena's use of the term "mercenary capital," with @DefiMoon lamenting, "Worse, early USDe supporters have now become mercenary capital."

Whether this update to Ethena's tokenomics will damage user participation in future ENA airdrops and harm the Ethena team's credibility remains to be seen. However, users of Symbiotic may need to worry about whether their points will be diluted by an increasing number of participants.