Business Analysis: Ethena big dump followed by rebound, is ENA worth buying?

Introduction

Ethena is one of the few phenomenal DeFi projects in this cycle, with its token's market capitalization exceeding 2 billion USD shortly after its launch. However, since April of this year, the token price has rapidly fallen, with Ethena's market capitalization retreating from its peak by more than 80%, and the token price retreating by as much as 87%.

Since entering September, Ethena has accelerated its cooperation with various projects, expanding the usage scenarios of its stablecoin USDE. The scale of the stablecoin has also begun to bottom out and rebound, with its circulating market value rebounding from a low of 400 million dollars in September to approximately 1 billion dollars now.

This article will focus on the following 3 issues:

1. Current business level: Ethena's current core business metrics, including scale, revenue, overall costs, and actual profit levels.
2. Future Business Outlook: The promising narrative and future development of Ethena
3. Valuation level: Is the current price of ENA in the undervalued hitting zone?

1. Business Level: The current core business situation of Ethena

1.1 The business model of Ethena

Ethena positions itself as a synthetic dollar project with "native yield"; in other words, its track belongs to the same category as MakerDAO, Frax, crvUSD, and GHO - stablecoins.

Currently, the business models of stablecoin projects in the crypto space are basically similar:

1. Raise funds, issue debt ( stablecoins ), expand the project's balance sheet.
2. Use the funds raised for financial operations to obtain financial returns.

When the revenue generated from the project's operating funds exceeds the total costs of raising funds and running the project, the project is profitable.

As a latecomer stablecoin project, Ethena is clearly at a disadvantage compared to established projects like USDT and DAI in terms of network effects and brand credibility. This is specifically reflected in its higher fundraising costs, as users are only willing to provide their assets to Ethena in exchange for USDE when they have higher return expectations. Ethena's approach is to incentivize users with project tokens ENA and to raise funds through the stablecoin (, which comes from the financial income of the project's operational funds ).

1.2 Core business data of Ethena

1.2.1 USDE issuance scale and distribution

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

Among the scale of over 2.72 billion, 64% of the USDE is in a staked state, with the current corresponding APY being 13%( official data).

It can be seen that the main purpose of most users holding USDE is to obtain financial returns, with 13% being the "risk-free return" based on USDE, which is also the financial cost Ethena currently incurs to raise user funds.

At the same time, the yield on short-term U.S. Treasury bonds was 4.25%( as of October 24, ), the deposit rate for USDT on Aave was 3.9%, while for USDC it was 4.64%.

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

USDE is not only issued on the Ethereum mainnet but also expands on multiple L2 and L1 chains. Currently, the scale of USDE issued on other chains is 226 million, accounting for approximately 8.3% of the total.

In addition, a trading platform, as an investor and important partner of Ethena, not only supports USDE as margin for derivatives trading but also provides a yield rate of up to 20% on USDE stored on the platform, which has been reduced to a maximum of 10% in September (. Therefore, this platform is also one of the largest custodians of USDE, currently holding 263 million USDE, peaking at over 400 million USDE ).

(# 1.2.2 Protocol Revenue and Underlying Asset Distribution

Ethena's current protocol revenue sources are three:

1. The income from the staked ETH in the underlying assets;
2. Funding rates and basis income generated from derivatives hedging arbitrage;
3. Financial Returns: Hold in the form of stablecoins to earn deposit interest or incentive subsidies, such as rewards from loyalty programs by holding USDC on certain exchanges; as well as sUSDS that exist in Spark.

According to data approved by Ethena officials via Token terminal, Ethena's revenue has rebounded from last month's low over the past month, with protocol revenue in October amounting to 10.63 million USD, a month-on-month increase of 84.5%.

![Business Analysis of Ethena: big dump of 80% followed by Rebound, is ENA worth buying?])https://img-cdn.gateio.im/webp-social/moments-952275de00f3729931c3d50b2297435f.webp###

Currently, a portion of the protocol revenue is allocated to USDE stakers, while another portion will go into the protocol's reserve fund (Reserve Fund), to address expenditures when the funding rate is negative, as well as various risk events.

The official documentation states, "The amount of protocol revenue for the reserve fund must be determined by governance decisions." However, the author has not found any specific proposals regarding the allocation ratio of the reserve fund on the official forum; the changes in the specific ratio were only announced at the beginning on their official blog. The actual situation is that the allocation ratio and logic of Ethena protocol revenue have been adjusted multiple times after launch. During the adjustment process, the officials initially listen to the community's opinions, but the specific allocation plan is still subjectively decided by the officials and has not undergone a formal governance process.

From the current perspective of 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. Therefore, Ethena's main source of income currently comes from BTC-dominated arbitrage positions, while the formerly emphasized ETH Staking income contributes very little due to its small asset proportion.

From the perspective of the average yield trend of BTC perpetual contract arbitrage, the average yield for the fourth quarter so far has deviated from the sluggish range of the third quarter and has returned to the level of the second quarter this year. As of now, the average annualized yield for this quarter is above 8%. However, even in the sluggish market of the third quarter, the overall average annualized yield for BTC arbitrage was also above 5%.

The annualized yield of ETH perpetual contract arbitrage is also similar to BTC, and it has currently returned to the 8%+ level.

Let’s take another look at the market contract size of Sol, which is about to be included as a base asset for Ethena. Even though Sol's price has risen this year, and the contract positions for Sol have significantly increased, currently reaching $3.4 billion, there is still a large gap compared to ETH's $14 billion and BTC's $43 billion, which do not include CME data.

The funding fee for Sol, based on the trading platform with the largest open positions, has recently shown an annualized funding rate similar to that of BTC and ETH, currently standing at around 11%.

In other words, even if Sol is later included as a contract arbitrage target for Ethena, its scale and yield currently 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 expenses and profit levels

Ethena's protocol expenses are divided into two categories:

1. Financial expenses, paid through USDE, with the payment object being the stakers of USDE, and the source of income is from Ethena's protocol revenue, ) derivative arbitrage and ETH staking, as well as stablecoin wealth management (.
2. Marketing expenses, paid through ENA tokens, are directed to users participating in various growth activities )Campaign### of Ethena. These users earn points by participating in activities and can exchange their points for corresponding ENA token rewards at the end of each quarterly event.

Financial expenditures are relatively easy to understand. For users who stake USDE, they have clear expectations for returns. The official website has clearly marked the current yield of USDE on the homepage: the current yield for staking USDE is 13%.

The complexity lies in the continuous various marketing campaigns that Ethena has launched since the project went live. They have different rules, and combined with specific behaviors incentivized by points, a weighting mechanism has also been introduced, involving comprehensive calculations of activities across multiple partner platforms.

Let's have a brief review of the series of growth activities following the launch of Ethena:

1.Ethena Shard Campaign: Epoch 1-2(Season1)

• Time: 2024.2.19-4.1( in less than a month and a half )
• Main incentive action: Providing stablecoin liquidity for USDE on Curve.
• Secondary incentive actions: Minting USDE, holding sUSDE, depositing USDE and sUSDE into Pendle, holding USDE on various cooperative L2s.
• Scale Growth: During this period, the scale of USDE grew from less than 300 million to 1.3 billion.

The amount of ENA spent, namely the total marketing expenditure: 750 million, accounting for 5%. Among them, the top 2000 wallets can instantly receive 50% of the ENA, while the remaining 50% will be distributed linearly over the next 6 months. The remaining small wallets have no unlocking restrictions. According to relevant data, nearly 500 million ENA has been 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 the beginning of June, ENA started to drop rapidly from $1, falling to a low of around $0.2, with an average price of about $0.6, and the remaining 250 million ENA was basically claimed during this period.

We can roughly estimate that the value of 750 million ENA is = 51 + 2.50.6, which is approximately 650 million US dollars.

In other words, the scale of USDE has grown by approximately 1 billion USD in less than 2 months, with corresponding marketing expenses reaching 650 million USD, not including the financial expenses paid for USDE.

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

2.Ethena Sats Campaign: Season2

• Time: 2024.4.2-9.2(5 months )
• Main incentive actions: locking ENA, providing liquidity for USDE, using USDE as collateral for loans, depositing USDE into Pendle, depositing USDE into the Restaking protocol, depositing USDE into a trading platform.
• Secondary incentive actions: Locking USDE in the official platform, holding and using USDE on partner L2s, using sUSDE as collateral for lending, etc.
• Scale Growth: During this period, the size of USDE grew from 1.3 billion to 2.8 billion.

The amount of ENA spent, that is, the marketing expenditure for the event: like the first quarter, the reward for the second quarter is also 5% of the total, which is 750 million ENA(. The 2000 wallets that receive the largest airdrop also face a 50% TGE and subsequent unlocking lasting up to 6 months). Based on ENA's current price of $0.35, the value corresponding to 750 million ENA is approximately 26 million dollars.

3.Ethena Sats Campaign:Season3

• Time: 2024.9.2 to 2025.3.23(7 months less than )
• Main incentive actions: Locking ENA, holding US in the officially designated cooperation agreement (DEX and mainly for lending ).