ENA token plummets over 80%, will algorithmic stablecoins fall into a death spiral?

Author: Alvis, MarsBit

In the world of cryptocurrency, algorithmic stablecoins have always been the white moonlight in the hearts of investors and developers, representing an ideal state where value remains stable even in the most uncertain market environments.

Ethena completed $20.5 million in funding last year and this year, attracting attention from heavyweight institutions such as Binance, OKX, and Dragonfly. VCs not only have confidence in this field but are also actively participating in it, jointly promoting the development of this innovative financial tool. At its launch, Ethena's issuance mechanism also ensured fairness, allowing even large holders to gradually obtain their shares only through linear unlocking.

Ethena has built a derivatives infrastructure to achieve "Delta Neutral," thereby obtaining stable returns. Additionally, it offers an annualized yield of up to 35%, combining both to provide investors with strong storage incentives.

In terms of marketing, Ethena has received support from influential KOLs in this bull market, such as @CryptoHayes, as well as endorsements from numerous venture capital firms, bringing significant exposure and trust.

The Uncertainty of Life, Like a Dream or Illusion

Just as Ethena, the algorithmic stablecoin project dubbed Luna 2.0 by the community, was at its peak, a crisis quietly descended.

The second season airdrop event for Ethena will officially end today, and according to CoinGecko data, ENA has dropped below $0.22 today, hitting a low of $0.2186, setting a new historical low. As of the time of writing, ENA is reported at $0.2318, having fallen 84% from its historical high of $1.52.

We can't help but wonder, what exactly happened to Ethena?

TVL

According to data from DeFiLama, Ethena's TVL is currently $2.73 billion, having fallen below the $3 billion mark, a decrease of nearly $900 million from the peak of $3.612 billion in early July. Since March, Ethena Labs' revenue has significantly declined. August's revenue was only $1.03 million, down about 96% from the peak of $26.26 million. Based on the revenue from the last 30 days, Ethena Labs' annual revenue is projected to be only $12.55 million.

This trend is not hard to understand: non-stablecoin stakers may choose to sell before the airdrop to avoid price drops, while stablecoin stakers might forgo the last few days of points earnings in search of higher-return projects.

According to data from Dune Analytics, USDe has experienced multiple destruction events worth tens of millions of dollars in the past month, which typically indicates a large amount of collateral being redeemed. Additionally, the supply situation of sUSDe (the staking certificate token for USDe) shows that over $100 million of sUSDe has been unstaked in the past week.

Reports indicate that three accounts from Abraxas Capital Mgmt redeemed up to $91.22 million in USDe from Ethena in the past week, making it the largest redemption among all accounts.

Protocol Yield

According to data from the Ethena Dashboard, its protocol yield and sUSDe yield peaked at 113.34% in early March, and as of August 28, the protocol yield has turned negative at -3.3%, while the sUSDe yield has fluctuated to 0.

Brief Overview of Ethena's Principles

As is well known, the core feature of perpetual contracts is that investors, whether holding long or short positions, must pay funding rates. When buying pressure exceeds selling pressure, the funding rate is positive for short investors and negative for long investors. This mechanism helps ensure that the price of perpetual contracts remains in sync with the spot market price. To maintain their positions, investors must provide margin, which serves as collateral to cover debts arising from changes in funding rates. If the funding rate is negative, it will gradually reduce the investor's margin balance until it reaches the level of forced liquidation.

Moreover, margin also has a compounding effect, meaning holding margin can allow asset value to grow. For example, holding stETH in Ethena is equivalent to holding a long position. If investors simultaneously hold a short position in stETH through perpetual contracts, they can theoretically achieve risk hedging, meaning losses from the short position can be offset by profits from the long position.

In summary, by purchasing stETH and using it as margin, investors can open corresponding short positions in perpetual contracts to achieve theoretical risk hedging and earn compounding returns from stETH (approximately 3%), while also bearing the risks associated with changes in funding rates.

It can be observed that due to Ethena's product mechanism, the platform's yield is significantly positively correlated with market conditions. In a bull market, staking yields and short funding rates can bring considerable income, while in a cold market or bear market, it will be relatively weak.

According to Coinglass data, since the market entered a period of fluctuation in May, funding rates have gradually decreased, often turning negative, which means Ethena's margin (collateral) will begin to be eroded or even liquidated, leaving only an unsupported asset.

Conclusion

In the first half of the year, USDe saw rapid growth in issuance due to the expected effects of airdrops and high yields provided by spot and futures arbitrage strategies. The total issuance of USDe once peaked at $3.6 billion, surpassing projects like FRAX, crvUSD, and GHO, which are supported by industry leaders, and seemingly having the potential to continue expanding and challenge DAI's leading position in the market.

In its recently updated token economic model, Ethena mentioned that starting from June 17, all users who obtained ENA through airdrops must lock at least 50% of their tokens; otherwise, they will lose the unallocated portion. This measure aims to alleviate the market sell-off pressure that may arise from airdrops to avoid a significant drop in ENA token value. However, currently, this downward spiral trend seems unstoppable.

Lessons from the Past

Two years ago, the death spiral of Luna is still fresh in memory. The risks of algorithmic stablecoins becoming unpegged and the potential risks during the re-collateralization process make one ponder deeply. Can algorithmic stablecoins exist in a perfect model? This question may be as thought-provoking and fascinating as the impossible triangle in the blockchain field.