Ethena, a synthetic dollar protocol built on Ethereum, has experienced a drastic decline in the past few weeks due to investors’ concerns about two significant risks in the network. Last Friday, the ENA token plummeted to an all-time low of $0.3508, marking a nearly 70% decrease from its peak value.
Ethena USDe risks
Ethena is a new platform supported by Arthur Hayes, Dragonfly, Synthetix, and AAVE. Its main product is the Ethena USDe stablecoin, an algorithmic product with over $3.5 billion in assets.
Due to its high yield potential, USDe has quickly become the fourth-largest stablecoin in the industry. Despite regular yield fluctuations, it has consistently remained above 10% since its launch.
USDe’s rewards are generated through a fairly complex process that involves staked asset consensus and funding and basis spread. The staked asset consensus comes from staking Ethereum, the second-largest cryptocurrency in the industry.
The funding and basis spread earned from delta hedging positions occur when minters provide assets in the process of minting the USDe token. Ethena then opens a corresponding short derivatives position to hedge the delta of the received assets.
However, this poses Ethena with its first risk because it is unclear whether these mechanisms will function effectively during periods of high volatility. Investors still remember the collapse of Terra, another platform that promised high returns to investors in 2022.
If the USDe stablecoin loses its peg, the price of Ethena could fall significantly.
Dilution to continue
It’s important to consider the following regarding Ethena’s price risk: there is a high likelihood of increased dilution in the network over the next few years. CoinMarketCap data reveals that the maximum supply of ENA is 15 billion tokens, while the circulating supply currently stands at 1.7 billion.
This indicates that close to 90% of all tokens are currently locked and will be released periodically. According to TokenUnlocks, the most recent token unlock took place this past Sunday, and the next one is scheduled for this coming Sunday. Tokens worth over $5.63 million will be unlocked during this process.
A substantial portion of these tokens will be allocated to Ethena’s investors, including individuals like Arthur Hayes and Dragonfly. Historically, these investors have tended to be among the first to sell off their investments after receiving their allocations.
As a result, it is highly probable that the price of ENA will continue to decline in the coming months as large institutions sell off their tokens.
