The cryptocurrency market has experienced a significant downturn over the past weekend. Bitcoin, after falling below $60,000, continued its decline to touch $49,000, marking a 24-hour drop of 18.5%. Ethereum saw an even more drastic fall, plummeting 25% to break below the $2,100 level. This resulted in a broad-based sell-off across the crypto market.
This sharp decline has added further pressure to an already cooling crypto market. The DeFi sector, which had been struggling to gain momentum, received a particularly heavy blow. According to data from DeFiLlama, Ethena Labs' revenue has dramatically shrunk since March. The current monthly revenue stands at just $1.03 million, approximately 96% less than its peak of $26.26 million. Projecting this current revenue (past 30-day income multiplied by 12) gives an annualized revenue of just $12.55 million.
Ethena Labs is the issuer of the USDe stablecoin. USDe maintains its peg and provides yield through a mechanism that involves collateral in BTC and stETH, while simultaneously creating short positions on Bitcoin and ETH to balance delta and capture funding rates from perpetual/ futures contracts. Essentially, it uses spot market gains to offset losses from short positions, achieving balance while capturing ETH staking rewards and funding rate income.
Bitcoin and Ethereum Funding Rates Turn Negative
For Ethena's model to succeed, demand for long leverage must remain high to sustain elevated funding rates, as this constitutes the majority of the protocol's revenue. Otherwise, the protocol is forced to pay exchanges to maintain its contract positions.
This means the USDe model primarily functions well only during periods of bullish market sentiment. The bull market in early 2024 drove high funding rates for short positions, which supported USDe's adoption during that period. However, according to official data, the supply of USDe saw a slight reduction in April before rapidly increasing again. By early July, as the cryptocurrency market entered a downward trend, the supply of USDe began to consistently decline.
Crypto influencer @OP Michael documented the state of Ethena's overall funding rates on April 13th, a time of extreme market pessimism. At that point, the composite funding rate for ETH was -9%, while for BTC it was just 2%. This meant the protocol and sUSDe holders were already facing losses.
Due to Ethereum's underperformance, Ethena has gradually shifted its staked assets towards Bitcoin to prevent further declines in returns. Official data shows that Ethena Labs' platform currently has a TVL of $3.18 billion, with reserve funds of $46.5 million. The collateral composition is 48% BTC, 30% ETH, 9% ETH LST (Liquid Staking Tokens), and 13% USDT.
The market's rapid correction, with sharp price drops across major assets, led to increased liquidations of long positions. Data from Coinglass indicates that total liquidations over the past 24 hours reached $1.02 billion, with long position liquidations accounting for $889 million and short position liquidations at $130 million. Funding rates for shorting continued to decline. According to the Ethena Labs website, the average Bitcoin funding rate dropped to -4.34%, while the average Ethereum funding rate reached a staggering -28.34%.
Although sustained negative funding rates throughout a year are typically extremely rare, Ethereum's price drop led to the liquidation of staked Ethereum positions. PeckShield monitoring reported that several ETH whales were liquidated today, with values exceeding millions of dollars each.
This sudden shift in conditions has also created selling pressure on ENA, Ethena's governance token. Data from CoinMarketCap shows ENA briefly touched $0.232, marking a 24-hour decline of 21%.
Dune Analytics data indicates that USDe has experienced multiple instances of burns on the scale of tens of millions of dollars over the past month, signaling large-scale redemptions of collateral. The supply of sUSDe (the staking receipt token for USDe) also shows that nearly $60 million worth of sUSDe was unstaked in the past week.
Influenced by these multiple factors, USDe itself experienced a slight deviation from its peg. According to CoinMarketCap data, its price briefly touched $0.997.
Can Ethena's Model Withstand a Bear Market?
During bull markets, the combination of staking rewards and funding rates from short positions enabled USDe to achieve impressive yields. Official data showed that Ethena's yield was particularly stunning in March, with the protocol yield and sUSDe yield reaching a high of 113.34% and a low of 8.55%.
However, as the market entered a sustained downtrend, the protocol yield briefly fell to -2.09% in mid-April before quickly rebounding to highs of 22.77% and 77.58%, respectively. But from June to the present (with official data only recorded up to July 31st), both the Ethena protocol yield and sUSDe yield have fallen below 20%.
Objectively speaking, Ethena's mechanism represents a significant innovation within DeFi. MakerDAO founder Rune Christensen had previously considered allocating 600 million DAI to USDe and staking it via the DeFi lending protocol Morpho Labs as sUSDe, though this plan faced opposition from various quarters.
Ethena achieved a TVL exceeding billions of dollars in an extremely short time frame. This rapid growth sparked concern within the community. The opposing viewpoints generally questioned USDe's resilience against adverse market conditions, arguing that its value is highly susceptible to market dynamics. Analyst Duo Nine (@DU09BTC) pointed out that a depeg of USDe is only a matter of time, and the larger the bubble grows, the more likely this becomes.
Ethena was born at the tail end of a bull market. The ensuing bear market conditions continue to test Ethena's resilience. With Bitcoin and Ethereum funding rates now negative and protocol annual revenue contracting, the question remains: can Ethena withstand this significant market correction and prove the viability of its mechanism? Only time will tell.
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Frequently Asked Questions
What is Ethena and what is USDe?
Ethena Labs is a DeFi protocol that issues USDe, a synthetic dollar stablecoin. USDe aims to maintain its peg and generate yield through a delta-neutral strategy involving collateral assets and short perpetual futures positions.
How does Ethena generate yield for USDe holders?
The yield primarily comes from two sources: the staking rewards earned on the collateral assets (like stETH) and the funding rates captured from the short perpetual futures positions. This works best in bullish markets with positive funding rates.
Why is the current market condition bad for Ethena?
During bearish or highly volatile markets, funding rates can turn negative. This means Ethena must pay funding on its short positions instead of earning it, which can lead to reduced or even negative yields, pressuring the protocol's economics.
What does a negative funding rate mean?
A negative funding rate indicates that traders who are shorting an asset are paying traders who are long. For Ethena, which holds short positions, a negative rate means it is incurring a cost instead of receiving income.
Has USDe ever depegged from $1?
Data shows that USDe has experienced minor deviations from its $1 peg during periods of extreme market stress, briefly trading at prices like $0.997. However, its mechanism is designed to arbitrage such deviations back to the peg.
Is Ethena's model sustainable long-term?
The sustainability is heavily debated. It thrives in specific, bullish market conditions. Its ability to endure prolonged periods of negative funding rates and bear markets remains a key question and risk for the protocol.