Business Analysis of Ethena: After a big dump of 80%, is it worth buying ENA?

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

Since entering September, Ethena has accelerated its collaboration with various projects, expanding the use cases of its stablecoin USDE. The scale of the stablecoin has also begun to bottom out and rebound, with its circulating market value rising from a low of 400 million USD in September to around 1 billion USD currently.

This article will focus on the following three issues:

1. Current business level: Ethena's current core business indicators, including scale, revenue, overall cost, and actual profit level.
2. Future Business Outlook: Ethena's Promising Narrative and Future Development
3. Valuation level: Is the current price of ENA in an undervalued strike zone?

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

1.1 Ethena's business model

Ethena positions itself as a synthetic dollar project with "native yield", which means it operates in the same field as MakerDAO, Frax, crvUSD, and GHO - stablecoins.

The business models of current cryptocurrency stablecoin projects are basically similar:

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

When the profits earned from the operation of the project exceed the total costs of raising funds and running the project, the project is profitable.

1.2 Ethena's core business data

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 a halt at 2.41 billion in mid-October, and it 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 status, currently corresponding to an APY of 13% (official website data).

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

At the same time, the yield on short-term U.S. Treasury bonds was 4.25% (data from October 24), the deposit rate of USDT on the largest DeFi lending platform Aave was 3.9%, while USDC was 4.64%.

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

USDE is not only issued on the Ethereum mainnet but also expanded across multiple L2 and L1. 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 offers 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 (over 400 million at its peak).

1.2.2 Protocol revenue and underlying asset distribution

Ethena currently has three sources of protocol revenue:

1. The income from the staked ETH in the underlying assets;
2. The funding rate and basis income generated from derivatives hedging arbitrage;
3. Financial earnings: Held in the form of stablecoins, earning deposit interest or incentive subsidies, such as receiving rewards from a loyalty program by placing USDC on a certain platform; as well as sUSDS existing in Spark, etc.

According to data approved by the Ethena official from Token terminal, Ethena's revenue in the past month has emerged from last month's low point, with protocol revenue in October reaching 10.63 million USD, a month-on-month increase of 84.5%.

A portion of the current protocol revenue is allocated to USDE stakers, while another portion will go into the protocol's Reserve Fund to cover expenses during negative funding rates and various risk events.

From the current underlying assets of Ethena, 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 previously emphasized ETH Staking income has a very small contribution ratio due to its small asset proportion.

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

The annualized yield for the perpetual contract arbitrage of ETH is also similar to that of BTC, and it has now returned to the position of over 8%.

Let's take a look at the market contract size of SOL, which will soon be listed as a base asset for Ethena. Even with the rise in SOL's price this year, the contract holdings of SOL have significantly increased, currently reaching 3.4 billion USD, but there is still a considerable gap compared to ETH's 14 billion USD and BTC's 43 billion USD (not including CME data).

As for SOL's funding fees, looking at the exchange with the largest position volume, its annualized funding rate in recent days is similar to that of BTC and ETH, currently at around 11%.

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

The protocol expenses of Ethena are divided into two categories:

1. Financial expenditures are paid through USDE, with the payees being USDE stakers, and the revenue source is the protocol income from Ethena (derivatives arbitrage and ETH staking, as well as stablecoin wealth management).
2. Marketing expenses are paid through ENA tokens, and the payment is made 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 after the end of each seasonal activity.

Financial expenses are relatively easy to understand. For users who stake USDE, they have clear income expectations. The official website clearly indicates the current yield of USDE on the homepage: 13%.

The complexity lies in the continuous various marketing campaigns that Ethena has launched since the project went live. They have different rules, coupled with a point system that incentivizes specific user behaviors, and also introduces a weighting mechanism that involves comprehensive calculations of activities across multiple cooperative platforms.

Let's take a brief look back at the series of growth activities following Ethena's launch:

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

• Time: 2024.2.19-4.1 (less than one and a half months)
• Main incentive action: Provide 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, that is, the total marketing expenditure of the event: a total of 750 million, accounting for 5%. Among them, the top 2000 wallets can instantly receive 50% of the ENA, and the remaining 50% will be distributed linearly over the next 6 months. As for the remaining small wallets, there are no unlocking restrictions. According to certain Dune dashboard data, nearly 500 million ENA has been claimed between June, while the highest price of ENA before June was about $1.5, and the lowest was about $0.67, with an average price of about $1; after the beginning of June, ENA began to fall rapidly from $1, dropping to around $0.2 at the lowest point, with an average price value of $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 corresponds to = 51 + 2.50.6, which is approximately 650 million USD.

In other words, the scale of USDE has increased by about 1 billion dollars in less than 2 months, with corresponding marketing expenses reaching as high as 650 million dollars, not including the financial expenses paid for USDE.

Of course, as ENA's first airdrop, the huge marketing expenditure at this stage 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 lending, depositing USDE into Pendle, depositing USDE into Restaking protocol, depositing USDE into a trading platform.
• Secondary incentive actions: Locking USDE on 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: just like in the first quarter, the reward for the second quarter is also 5% of the total amount, which is 750 million ENA (among them, the 2000 wallets with the largest airdrop amount are also subject to 50% TGE and subsequent unlocking lasting up to 6 months). Based on the current price of ENA at $0.35, the value corresponding to 750 million ENA is approximately $260 million.

3.Ethena Sats Campaign: Season 3

• Time: From 2024.9.2 to 2025.3.23 (less than 7 months)
• Main incentive actions: Lock ENA, hold USDE in officially designated partnership agreements (primarily DEX and lending), deposit USDE in Pendle.
• Scale Growth: As of now, despite the plans for the third quarter, the scale growth of USDE has encountered a bottleneck. Currently, the scale of USDE is approximately 2.7 billion, which has decreased slightly from the 2.8 billion projected for the start of the third quarter.
• Amount of ENA spent: However, considering that the third quarter is close to 7 months, which is longer than the second quarter, and the ENA reward incentives are likely to continue to decrease, the total incentive amount for ENA in the third quarter is still expected to maintain 5% of the total, which means there is a higher probability of it being 750 million.

At this point, we can make a rough calculation of the total expenditure of the Ethena protocol since its launch this year until now (October 31).

• Financial expenditure (paid to USDE stakers in stablecoin): $81.647 million
• Marketing expenses (paid to users participating in the event in the form of ENA tokens): $6.5 + $2.6 = $9.1 million (this does not include potential expenses after September)