Ethena price continued its downtrend continued on Thursday, as it went down by 7.78% to trade at $0.855. USDe’s downtrend started on April 11th and it has accumulated losses amounting to 29% in the last week. Its market capitalization has also taken a hit, slipping to a valuation of $1.2 billion from $2.4 billion during that period. It has also moved from being the 5th-largest stablecoin to number 68 in the overall crypto asset market ranking by capitalization.
This has exposed the protocol to funding risks due to the wide divergence between the steep price corrections and slow funding rate. After becoming the fastest growing stablecoin in history, Ethena could as well go down as the fastest declining stablecoin in history-if it maintains its current trajectory.
What is Ethena (ENA) and how does it work?
Ethena is a synthetic currency protocol run by Ethena Labs and built on Ethereum. Its finance structure is delinked from the mainstream banking and offers a yield-bearing USDe stablecoin *from staked Ethereum and derivatives market) , in what has come to be described as “Internet Bond”. Users mint USDe by depositing stablecoins like Tether, USDC etc. The minted USDe can then be staked to earn yields.
USDe is pegged to the dollar at a 1:1 ratio, with backing from crypto assets like Ethereum and Bitcoin. It maintains its stability through delta hedging, which is a strategy that reduces the directional risks resulting from price movements of the underlying asset.
Fewer investors take short positions against crypto assets due to the widespread belief that crypto will keep rising. Therefore, Ethena generates earnings from the funding rates of long contracts to settle short positions, ensuring limited risk. However, if the market becomes bearish, short positions go past the spot price, leading to a negative funding rate. Consequently, short holders are able to pay long contract holders and bring the protocol near spot market prices.
One of Ethena’s key attractions is that it has kept off US Treasuries and cash in its reserves, instead choosing to use crypto assets. This makes it censorship-resistant. However, the downside to it is that Ethena’s reserve risk being constrained if its market capitalisation rises at a faster rate than the reserve funding rate. That is because short positions become larger as the market cap grows. This has led to speculation that it could encounter the same challenges as LUNA. However, the Ethena Labs team denies this, due to different funding mechanisms and trading strategies used by the projects.
Technical analysis
Ethena price has its pivot at 0.892, and the downside is likely to prevail if resistance persists at this level. That could see the bears break the support at 0.822 in extension, and potentially test 0.778. However, if Ethena price returns above 0.892, it could favour the buyers to breach the resistance at 0.927, and build the momentum to potentially test 0.961 in extension.
