Original title: "ENA token plummets by more than 80%, will algorithmic stablecoins fall into a death spiral?"

Original author: Alvis, MarsBit

Editor's note: Today is September 4th, and it has been exactly 7 years since the Chinese government stopped ICOs on September 4th, 2017. Today, the crypto market has ushered in a new round of declines, and Bitcoin once fell below $56,000. The protagonist of this article, ENA, also hit a new historical low after yesterday, almost falling below $0.2, and was temporarily reported at $0.218 as of press time. Yesterday, Ethena Labs officially issued a statement saying that the second season airdrop event has ended and the third season airdrop has been launched. For details, please refer to: "Ethena Season 3 Airdrop Event Launched, Detailed Explanation of the New sENA Token Gameplay". The huge amount of unlocked tokens has also added more negative factors to the future trend of ENA. From glory to deep crisis, what happened to ENA? Is the spiral decline of algorithmic stablecoins inevitable? Regarding these issues, perhaps this article can give you some thoughts. BlockBeats reprinted the full text as follows:

In the world of cryptocurrency, algorithmic stablecoins have always been the white moonlight in the hearts of investors and developers. It represents an ideal state that can maintain stable value even in the most uncertain market environment.

Ethena completed $20.5 million in financing last year and this year, attracting the attention of a number of heavyweight institutions including Binance, OKX, Dragonfly, etc. VCs are not only optimistic about this field, but also actively participate in it to jointly promote the development of this innovative financial instrument. When it was first launched, Ethena's issuance mechanism also guaranteed fairness. Even large users could only gradually obtain their shares through linear unlocking.

Ethena built a derivatives infrastructure to achieve "Delta neutrality" to obtain stable returns. In addition, it also provides an annualized rate of return of up to 35%. The combination of the two provides investors with a strong storage power.

In terms of marketing, Ethena has received support from a group of the most influential KOLs in this round of bull market, such as @CryptoHayes, as well as endorsements from many venture capital companies. It has brought huge exposure and trust to investors.

Things in life are unpredictable, like a dream bubble

Just when Ethena, the algorithmic stablecoin project known as Luna2.0, was invincible and in full swing, the crisis quietly arrived.

The second season of Ethena's airdrop activity will officially end today. According to CoinGecko data, ENA fell below $0.22 today, falling to a minimum of $0.2186, setting a new historical low. As of press time, ENA was reported at $0.2318, down 84% from its historical high of $1.52.

We can't help but sigh, what happened to Ethena?

TVL

According to DeFiLama, Ethena TVL is currently $2.73 billion, which has fallen below the $3 billion mark, a decrease of nearly $900 million from the peak of $3.612 billion in early July. Ethena Labs' revenue has dropped significantly since March. Revenue in August was only $1.03 million, down about 96% from the peak of $26.26 million. Based on the revenue in the last 30 days, Ethena Labs' annual revenue is expected to be only $12.55 million.

This trend is not difficult to understand: non-stablecoin stakers may choose to sell before the airdrop to avoid price drops, and stablecoin stakers may also give up the last few days of point gains and look for projects with higher returns.

According to Dune Analytics, USDe has experienced multiple destruction events worth tens of millions of dollars in the past month, which generally indicates that a large amount of collateral has been redeemed. In addition, the supply of sUSDe (USDe pledge certificate token) can also be seen that more than 100 million US dollars of sUSDe have completed pledge release in the past week.

It is reported that three accounts of Abraxas Capital Mgmt redeemed up to 91.22 million US dollars of USDe from Ethena in the past week, and its redemption funds ranked first among all redemption accounts.

Protocol Yield

According to Ethena Dashboard data, its protocol yield and sUSDe yield reached a peak of 113.34% in early March. As of 08.28, the protocol yield has been negative -3.3%, and the sUSDe yield has changed to 0.

Brief Introduction to Ethena Principles

As we all know, the core feature of perpetual contracts is that investors need to pay funding rates whether they hold long or short positions. When the market buying power exceeds the selling power, the funding rate is positive for short investors and negative for long investors. This mechanism helps ensure that the price of perpetual contracts keeps pace with the spot market. To maintain their positions, investors must provide margin, which is a collateral used to cover the debts incurred by changes in the funding rate. If the funding rate is negative, it will gradually reduce the investor's margin balance until it reaches the level of forced liquidation.

In addition, margin also has a compounding effect, that is, holding margin can increase the value of assets. For example, in Ethena, holding stETH is equivalent to holding a long position. If investors also hold a short position of stETH through perpetual contracts, risk hedging can be achieved in theory, that is, the loss of the short position can be offset by the profit of the long position.

In summary, by purchasing stETH and using it as margin, investors can open corresponding short positions in perpetual contracts to achieve theoretical risk hedging and obtain the compound interest income of stETH (about 3%) from it, while bearing the risks brought by changes in funding rates.

It can be found that due to Ethena's product mechanism, the platform yield is very obviously positively correlated with the market. The pledge income and short funding rate in a bull market will bring it considerable income. On the contrary, it will be relatively weak when the market is cold or the market is bearish.

According to Coinglass data, since the market entered a period of volatility in May, the funding rate has gradually decreased, and in many cases even turned negative, which means that Ethena's margin (collateral) will begin to be eroded or even liquidated, and at that time there will only be an asset without any support.

Summary

In the first half of the year, USDe's issuance volume grew rapidly due to the expected effect of its airdrops and the high returns provided by spot and futures arbitrage strategies. The total amount of USDe minted once reached a peak of 3.6 billion US dollars. It not only surpassed projects supported by industry leaders such as FRAX, crvUSD, and GHO in the decentralized stablecoin track, but also seemed to have the potential to continue to expand and challenge DAI's leading position in the market.

Ethena mentioned in its recently updated token economic model that starting from June 17, all users who received ENA through airdrops must lock up at least 50% of their tokens, otherwise they will lose the unallocated portion. This measure is intended to alleviate the market selling pressure that airdrops may bring to avoid a sharp drop in the value of ENA tokens, but at present, this downward spiral seems unstoppable.

Lessons from the past, teachers for the future

Two years ago, Luna's death spiral is still vivid. The risk of algorithmic stablecoins depegging and the potential risks in the re-mortgage process are all worth pondering. Can there be a perfect model for algorithmic stablecoins? This question may be as thought-provoking and fascinating as the impossible triangle in the blockchain field.

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