$ENA - Linear Maker; Exponential Ethena

Overview of Ethena

• ◆building the synthetic dollar w/ internet native yield; the peg of USDe (its native stablecoin) is supported through delta hedging derivatives against protocol held collateral
• ◆yield of the stablecoin USDe is generated through a) native ETH emissions + b) funding rate from shorting ETH on centralized trading venues; and currently yield of staked USDe (sUSDe) is 4.4%
• ◆token value accrual of $ENA comes from a) locking up of $ENA to boost potential future rewards + b) restaking for economic security to secure cross chain transfers of USDe

Investment Thesis

• ◆[potentially fastest horse in DeFi when the tides turn + do not want to write $ENA off in the anti low float high FDV meta + current valuation of >3bn FDV gives good odds w/ something of the potential to make >300mn annualized top line fees w/ <2bn TVL casually as shown in March]
• ◆secular stablecoin growth as one of the very few products in all crypto w/ proven product market fit; out of which market share of decentralized stablecoin is also expected to expand (i.e. <5%)
  • ◆deep on / off chain integration including a) Bybit accepting USDe as collateral to trade perps while capturing yield w/ BTC and ETH spot trading pairs + b) USDe and USDe also integrated w/ Solana DeFi protocols such as Kamino and Drift
  • ◆stellar founding and BD team + strong ventures backers making them the quickest stablecoin to reach >3bn in TVL in all DeFi history in the course of less than a year
• ◆on a protocol level + competitive angle; a) $ENA has the potential to print astronomical fees+ b) retain majority of its value to protocol’s earnings + c) better capital efficiency compared to other decentralized stablecoin protocols
  • ◆staked USDe natively generates higher yield from a) ETH native yield + b) negative funding rate which could go as high as >30% in a directional market; as opposed to Maker which finds yield from stability fees (>5% on TVL which is expensive) + RWA vaults that comes with interest rates headwind that limits the protocol fee growth
  • ◆given native higher yields; Ethena is able to retain most value from the fees generated to the protocol (i.e. >13% of USDe supply converted to protocol earnings) as opposed to Maker having to a) pass most to sDAI through DSR and retain only <2% of DAI supply on average + b) tough to adjust stability fees upwards which strips away protocols’ pricing power
  • ◆w/ better use of capital in which each dollar TVL creates the equal dollar amount of USDe; as opposed to Maker having to be over collateralized (i.e. each $DAI requires >130% in TVL)

Valuation Analysis

• ◆effectively paying >60x FDV / annualized L30D fees now w/ <2.7bn in USDe supply now pricing in stronger growth w/ reasons mentioned above + function of low float
• ◆last cycle DAI supply peaked at <10bn and UST supply peaked at >18bn; assuming $USDe reaches a similar scale + $ENA retains most of the value and protocols earnings be at <5% of USDe supply; slapping a >20x P/E gives a >15bn outcome which is a close to 5x
• ◆theoretically this should be a conservative assumption; when market becomes directional the value retained to the protocol should be closer to the March’s numbers which means they could retain >10% from USDe’s total supply + multiple expanding

Catalyst

• ◆season 2 ended few days ago; giving out 5% of total token supply which could lead to more dumping in the short run but next season would not end in months + huge early investors unlocking comes next April giving a window of limited supply overhang
• ◆interest rates are coming down in September earliest as most expect; direct competitor $MKR (or $SKY) would be directly impacted although RWA is only a fraction of what Maker’s making now

Risks

• ◆investor unlocking happening next April effectively more than doubles circulating supply of $ENA + venture investors up by multiples so profit taking is a serious problem
• ◆systematic risks when USDe grows; we have never lived in a world where funding rate is overlayed by a structural short position in large cap collateral assets

Execution

• ◆liquid in most centralized venue including Binance and OKX; could get a bit creative OTCing w/ early venture investors to lock in DPI for them even with a huge discount to the current FDV
• ◆would assume funds’ positioning in this name is light given how price action has been since TGE