What is Ethena, and its Risks

Another popular yield vault is Ethena, an exciting protocol enabling the internet bond. How exactly does it work?

Just like in our explainer for Eigenlayer, we start with the base asset in its natively staked form - so staked Ethereum. This means that it is securing the Ethereum blockchain and already receiving rewards.

Instead of restaking, or having that same staked Ethereum be used to secure another network or AVS, Ethena allows you to use staked Ethereum as collateral to mint Ethena’s synthetic dollar, USDe, for which Ethena is at the same time creating a short position on ETH to hedge the ETH/USD price risk. These USDe tokens can then be staked (sUSDe) to generate yield or locked to earn points in Ethena's airdrop campaigns ("Ethena Sats").

Ethena's yield is thus generated from multiple sources:

  1. Ethereum staking yield

  2. Funding and basis spread earned from the delta hedging derivatives positions

  3. Ethena's airdrop campaign

For further explanation: Yield Explanation | Ethena Labs

ENA Airdrop and Season 2: Sats Campaign: https://mirror.xyz/0xF99d0E4E3435cc9C9868D1C6274DfaB3e2721341/GTbzFynrve4gzSjIEKL0vz7Kq0UHkIiekHkup0EXgjU

What are the risks?

No free cake in life. Let’s talk about the risks that staking with Ethena may have. If you check their docs, they are quite transparent on the risks that USDe bear:

  1. Funding Risk - negative funding rates over a long period (affecting the shorts Ethena makes when you mint USDe to maintain delta neutrality).

  2. Liquidation Risk - risk of an exchange forcibly closing your position when the value of your collateral falls below a certain threshold.

  3. Custodial Risk - Ethena has off-exchange settlement providers hold protocol backing assets, so their ability to safely guard assets is a potential risk.

  4. Exchange risk - Ethena uses exchanges to perform the shorts, etc. If something were to happen to these exchanges, this could disrupt flow.

  5. Collateral risk - Collateral risk is the risk of the value of your collateral dropping below a certain threshold, causing your position to be liquidated. In the context of Ethena, this can happen if the price of the staked asset (stETH) falls significantly compared to the underlying asset (ETH).

To learn more visit Ethena docs here: https://ethena-labs.gitbook.io/ethena-labs/solution-overview/risks

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