Former DeFi celebrity Andre Cronje expressed concerns about the emergence of “new stablecoins” which coincided in timing and topic with the issuance of Ethena tokens. The community believed that he was referring to the stablecoin project Ethena, which is strongly supported by BitMEX founder Arthur Hayes.
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Ethena token ENA airdrop initiated! MakerDAO proposes to invest 600 million in USDe
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The ENA token of Ethena is positioned as a governance token, but so far, it has not fulfilled any practical functions. However, the token’s price has continued to rise since its launch, surprising many people.
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Here are his thoughts:
Table of Contents
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“This new protocol carries very high risks”
Unsound aspects of the Ethena mechanism
Perpetual contract –
Margin/collateral –
Mechanism – Almost impossible to achieve
In this field, new things often emerge. I often find myself in the middle of a broad curve for a long time. I feel comfortable here. Nevertheless, some events in this industry, I wish I were more curious about them, and there are events that I absolutely did not anticipate.
I am very certain that UST will fail, and its mechanism does not make sense to me. However, many people I consider very smart are very adamant that it will not fail, which makes me believe that “I am wrong.” As for FTX, I did not expect it to collapse. When people asked me if they should withdraw, my default answer was “yes, why take risks,” but that is my default response to holding assets on any exchange. I did not anticipate the events surrounding FTX. I added this preamble to say that often I simply do not know.
Nevertheless, there is a new original concept gaining a lot of attention. I see it being integrated into a protocol that I believe carries very low risks. But based on my understanding (which may be incorrect), this new protocol carries very high risks.
So, I don’t want to name names. I want to ask those who are smarter than me where I misunderstood, as I have gone through all the visible documents and read others’ evaluations, but I still can’t see how the risks are mitigated.
Firstly, the composition of this mechanism:
In a normal spot transaction, you simply buy an asset. (More specifically, you sell one asset (short it) and buy the corresponding asset (long it). For example, in a BTC/USD trade, you are buying (going long) BTC and selling (shorting) USD.)
If the value of BTC against USD rises, you make a profit. We call these spot transactions because even if the value of BTC/USD drops, you still own BTC assets.
Perpetual trading is a tool that achieves a similar transaction without involving any assets, somewhat like directional gambling rather than trading.
A very unique aspect of perpetual trading is that buyers (longs) and sellers (shorts) need to pay “funding rates.” If the buying demand significantly exceeds the selling demand, sellers will receive a “positive funding fee” while buyers will receive a “negative funding fee,” which is to ensure that the perpetual price converges to its spot price (this mechanism is identical to loan interest rates).
To maintain your open position, you need to provide collateral, which is essentially the “funding fee debt” that funds your collateral. If the funding fee becomes negative, it gradually consumes your collateral until your position is liquidated.
The next part of this mechanism is collateral based on yields, assets that appreciate when held, in this case, stETH.
So if I have 1 stETH, I am long stETH. So if I open a short perpetual position of 1 stETH, I am theoretically “neutral.” Because even if I lose $100 on the shorting of stETH, I gain $100 on the longing of stETH. The above statement ignores the fact that the only place I could find that accepts stETH as collateral is ByBit. The above also ignores the funding rates.
The theory here is that you can buy $1,000 worth of stETH and use that as collateral to open a $1,000 short stETH position, achieving “neutrality” while earning stETH yields (around 3%) + any funding rates paid.
I am not a trader, and except for some experimental trading to build DeFi products, I admit this is not my area of expertise. I try to compare these tools with commonalities I know, namely collateral and debt.
Based on my experience, eventually, you need to close the position (no longer neutral) or get liquidated. So now I assume the theory here is that “these positions will only be closed when the market turns,” but that’s a bit like saying “buy when BTC goes up and sell when it goes down,” why does that sound like a joke, because “it sounds simple,” but in practice, it is almost impossible to achieve.
So, when everything is going well (because the market is positive and the funding rates for shorts are positive [because everyone is willing to go long]), eventually, the situation changes, funding turns negative, collateral gets liquidated, and you end up with an unsupported asset.
The counterargument to this is the “law of large numbers,” which is almost the same as the $1 billion BTC fund for UST, etc. “It will work until it doesn’t.”
So, I want to ask the greater wisdom group to help me understand where I went wrong and what I missed.
Andre Cronje
ENA
Ethena
Further reading
ENA token of Ethena begins airdrop! MakerDAO proposes to invest 600 million in USDe
Binance Launchpool project Ethena (ENA) to commence tomorrow, BNB surpasses $600 again