Imagine a digital dollar that operates entirely outside the traditional banking system, providing stability and accessibility through the blockchain. This is where Ethena comes in play.
Ethena, also known by the market ticker ENA, is a synthetic dollar protocol built on the Ethereum network, that provides a crypto-native solution for money, which does not rely on the traditional banking system infrastructure and utilises a globally accessible dollar-denominated instrument – known as the ‘Internet Bond’.
Ethena’s synthetic dollar, USDe, provides a crypto-native, scalable solution for money transfer which is achieved by delta-hedging Ethereum and Bitcoin collateral.
But what does all that mean, and what makes a synthetic dollar different from a stablecoin?
What is Ethena?
As you might expect being built on the Ethereum network, Ethena is a Proof-of-Stake platform, though it utilises Layer-2s such as Swell to issue and distribute its USDe stablecoin. Swell is a liquidity staking protocol that allows ETH token holders to earn income through staking without locking up capital.
Ethena was founded by Guy Young back in 2022, and at its core is USDe an algorithmic stablecoin that looks to remove the dependency on centralised banking solutions for issuing their stablecoin.
But let’s start with some definitions.
A stablecoin is an asset that has its value linked to another asset, known as a peg.
For example, USDT is pegged to the US dollar.
Its value is maintained at a 1:1 ratio as USDT should always have an equal amount of dollars in reserve to match the amount of USDT they are issuing.
Ethena, on the other hand, is an algorithmic stablecoin, although their preferred terminology is synthetic dollar.
Practically speaking, these two terms are almost functionally the same.
The only difference between an algorithmic stablecoin, or synthetic dollar, and a regular stablecoin is how their backed assets are generated to ensure their value. Which I will come back to shortly.
What’s most important to note at present is that Ethena’s USDe is not the same as a fiat stablecoin like USDC or USDT.
As I mentioned, USDe is a synthetic dollar, backed with crypto assets and corresponding short futures positions to maintain its value.
This means that the risks implicated by interacting with USDe are inherently different than typical stablecoins, but practically speaking, for the end user, they act much the same way as typical stablecoins except for what backs their value.
In Ethena’s view, for any functional truly independent financial system to work at scale, a reasonably stable asset not reliant on traditional banking infrastructure is required for both transactional money as well as providing the core base asset for its funding.
To expand further, the issue with reliance on traditional stablecoins is usually the fact that control is still held by one single entity, which ultimately has control over whether the network functions or not.
As an example, USDC is owned and operated by Coinbase, which is operated from the United States. Meaning, if Coinbase, or the United States, ever decided to shut down USDC there would be no way for anyone to stop it as its control is held in a single, centralised location.
This is where Ethena’s synthetic dollar and the Internet Bond come into play.
So how does it all work exactly?
How does Ethena work?
To achieve this without the help of traditional banking infrastructure, the USDe peg stability is supported through the use of delta hedging derivatives positions against protocol-held collateral.
Protocol-held collateral refers to any asset owned by Ethena, think Ethereum and Bitcoin.
Whereas delta hedging is an options trading strategy that aims to reduce, or hedge, the directional risk associated with price movements in the underlying asset.
The directional risk is the future value of the asset, i.e. will the price go up or down.
Additionally, the ‘Internet Bond’ combines yield generated from staked assets, such as the protocol-held staked Ethereum or Bitcoin, to be used as backing assets, as well as the funding pool for the perpetual and futures markets, to create the first on-chain crypto-native solution for money.
For clarity, crypto-native in this context refers to the fact Ethena is backed by assets outside of the traditional banking system.
This also means there is no one single centralised authority with the access or ability to shut down the Ethena network. So why is Ethena unique?
What makes Ethena unique?
In short, if Ethena can succeed where all other algorithmic stablecoins have failed then it will be a technical marvel and worthy of its praise.
However, what will make Ethena truly unique is how it manages to avoid the inevitable death spiral which has cursed all previously released algorithmic stablecoins, such as Terra’s UST.
Though, Ethena is not willing or looking for this to happen and does have a few mechanisms in place to combat this possibility.
For example, the network has built a cycle where if the yields go negative and users redeem the stablecoin, any short positions held would be closed which reverts the funding back to the required levels.
Additionally, Ethena has two additional measures to help ensure network stability and security.
First, through an insurance fund which aims to ensure the value always remains at its peg.
Secondly, if that fails, also built into the design are additional mechanisms to ensure even if the insurance fund has been drained that any impact from negative funding would incur a gradual loss rather than a dramatic one, such as by including a 7-day unstaking period of staked USDe.
Now that we know what Ethena is and how it works, let’s explore the Tokenomics of the ENA token.
ENA and USDe Tokenomics
Ethena’s network can be broken down into two assets.
ENA, the native token of Ethena, is used for governance and can also be used for staking on certain other platforms.
USDe is minted via staked Ethereum, or stETH, through the Ethena app and can be used for payments and staking.
As USDe is minted via staked Ethereum, it has an unlimited potential supply.
For ENA however, the max supply is 15 billion and has a staggered vested release schedule which unlocks all the tokens between now and 2028.
Once all the token allocations have been unlocked, the distribution will look as follows:
30% will be given to the Core Contributors, 25% will go to Ecosystem Development, another 25% will go to Investors, followed by 15% to the Foundation, and a final 5% which was given away during the token airdrop and is already fully unlocked.
While Ethena is exciting, as the use case it can provide will be immense and truly revolutionary should they pull it off, it is not without its criticisms.
For example, while Ethena aims to be the first true “crypto-native” platform it is worth noting they still rely on centralised exchanges for their delta hedging and short positions.
Meaning, centralised exchanges still hold a relative position of influence over the Ethena network.
That said, currently, Ethena looks very promising, and should it succeed the rewards will likely be immense.
But, as always, nothing is ever guaranteed in crypto, and how well Ethena performs over time is likely dependent on how well its platform handles the stresses of a highly volatile market.
How to create an ENA wallet
Step 1: Visit https://trustwallet.com If you already have a Trust Wallet, skip to Step 5.
Step 2: Download and install Trust Wallet from your mobile app store or your browser.
Step 3: Open Trust Wallet and create a new wallet or import an existing one.
Step 4: Once your wallet is set up, tap on the “Add Token” button.
Step 5: In the search bar, type “ENA” to find the token.
Step 6: Tap on the ENA token and select “Add to Wallet” to add it to your Trust Wallet.
After adding ENA to your Trust Wallet, you will be able to view your ENA balance and perform transactions with the token.
If you want to support the blog, please donate $ENA to this address: 0x926f05Cafd858CA824152dAe62d359cC60e804c5