The Evolution of Ethena: Challenges and Emerging Opportunities

In April of this year, we outlined our thinking around Ethena. Since then, a lot has changed:

  • Ethena added an additional $750M in USDe supply, officially making it the fourth largest “stablecoin” at $3.1B
  • The protocol has now generated over $100M in cumulative revenue, $42M of which has been retained as protocol earnings
  • Ethena is now the second largest revenue producing DeFi app in crypto, second to only MakerDAO
  • As of yesterday, USDe is officially live on Solana

However, despite Ethena’s nominal success on paper, the token has been down only. If you bought $ENA at TGE you would now be down over 57%. If you bought the pico top, you would be down over 82%…

While the gravity of pending unlocks certainly explain $ENA’s price action to some degree, it seems the future prospects of Ethena may also be coming into question.

In this AF post, we will revisit the Ethena thesis and explore whether or not these concerns are warranted. Additionally, we will outline alternative avenues for the protocol to monetize USDe’s success and accordingly entertain what the future may hold for Ethena.

Ethena’s Competitive Advantage + Market Headwinds

Stablecoin issuers have some of the widest structural moats in crypto. Their defensibility is ultimately downstream of the tendency for stablecoin standards to embed themselves in the fabric of crypto markets. While not a traditional stablecoin by definition, USDe has been no exception to this rule. Since its launch, Ethena has been able to cultivate an early moat stemming from four primary sources:

  1. CEX integrations – sUSDe has become increasingly acce
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Personally not too worried about competition here. There's arguably no product in crypto with more network effects than a stablecoin. Ethena has done an awesome job getting integrated into every single L1/L2 as well as now native integrations on CEXes such as Bybit/Bitget. They're also the first-mover, have all the CEXes on their cap table, and have the brand/reputation which is super important in this space.

There's also a more fundamental advantage I don't see many ppl talk about. Unstaked USDe effectively acts as leverage on the sUSDe basis yield, making it very hard for anyone else to compete. Ethena is currently sending ~80% of protocol revenue to sUSDe, and since roughly half of supply is unstaked, it basically doubles the basis yield for stakers. Any competitor has to at least clear that yield + the implied sats ENA yield on-top + some risk-premium to get ppl to move to some new, untested protocol

You might say Ethena becomes vulnerable "once incentives run out", but they have 25% of supply earmarked for incentives and so far has only deployed 5%. Using the remainder, they'll be able to run a few more seasons/years of incentives at least and at that point should've built an even more sizeable and hard to attack moat.

This is good pushback, especially your point that just 5% of 25% of total incentives have been allocated thus far. I would also add that unless a competitor's token is as valuable as $ENA, then their token incentives also won't go as far. This would ironically imply that part of Ethena's moat is the price of $ENA itself.

I think the bigger headwind for Ethena will be structurally lower funding rates going foward.

This is a great write up, and excellent insight into how "integrated defi ecosystems" are likely to mature. Inherent yield can come from multiple sources, not just a basis trade, but I think this is the end game for a full suite of defi services, using a canonical yield bearing asset as the medium of exchange and fee currency.

I see OG defi protocols pursuing this type of vertical integration around a decentralized stable coin, all converging on offering the same services. FRAX, Aave, Maker, etc. Would be great to see a comparison piece on current usage/revenue, announced road maps, team size and quality, and tokenomics for the frontrunner ecosystems. I think the 'dispersion' in this cycle will continue to be biased towards projects with revenue that are building a vertically integrated suite of defi apps, as institutional money is allocated into 'alt coins' , this could be the first PMF 'use case' for smart contracts to mature and trade on fundamentals. If you have any thoughts on projects/defi tokens with the most attractive valuations, it would make for great additional alpha feed content ;)

I couldn't agree more here that we will continue to see more projects vertically integrate. When (1) DeFi protocols are inherently undifferentiated (2) code is a commodity and (3) tokens/points can be used to acquire users, it is extremely difficult to cultivate a moat as a DeFi app. Vertical integration seems like a logical path as a means to raising switching costs. I see this trend manifesting in four primary ways:

  1. Stablecoins integrating apps - Ethena would fit into this category. Maker launching Spark and other subDAOs would as well. I could see Tether or Circle launching their own payments apps in the near future. 

  2. Apps integrating stablecoins - Projects such as M^0 are making it easier for apps to spin up their own stablecoin. Given apps are really the "distributors" of stablecoins, I expect more apps to try to monetize this position by capturing their own stablecoin economics. Agora is also building toward this vision.

  3. Wallets integrating DEXs - Given their proximity to the end user and privileged position as the "originator" of user order-flow, we are seeing more wallets vertically integrate by enshrining native DEXs at the wallet layer. MetaMask swaps already generates a meaningful amount of revenue. Wallet swappers tend to be more fee-agnostic.

  4. DEXs integrating wallets - We are also seeing DEXs such as Uniswap try to get closer to the end user to front-run this trend by vertically integrating up the stack and building out their own wallet.

Ironically, this would imply that Frax was directionally correct in their vision this whole time, just never nailed timing and execution.

On your second question about projects/defi tokens with the most attractive valuations, I wrote a recent AF post on MakerDAO. Not only do I expect MKR's fundamentals to continue to improve but "Endgame" will likely be accompanied by numerous near-term catalysts. Give it a read :)