ArkStream Capital: Why we invested in Ethena

Ethena, the Prologue of a New Era of Strategic Investment

On November 5, 2024, Trump successfully won the US election, which marked that the United States is about to usher in an economic transformation led by traditional industry and decentralized finance. The core of Trump's policy is to break the constraints of the US dollar hegemony on the US domestic economy, revitalize the industrial economy, and weaken the excessive control of the Democratic Party and the financial capital behind it over the US economy. In early November, ArkStream Capital keenly saw the crucial role played by Ethena (ENA) in this historical moment and made a strategic investment of US$5 million in Ethena.As one of ArkStream's heavily invested projects, Ethena's performance has met our expectations and is bringing us excellent financial returns.

Ethena, as an innovator in the DeFi field, is committed to providing a variety of stable and scalable crypto-native currency solutions. Its first stablecoin is the crypto-native synthetic dollar USDe. The core innovation is to maintain the intrinsic stable value by holding the spot and corresponding short positions of a variety of mainstream crypto assets through the use of Delta hedging strategies. This design does not rely on traditional traditional US dollar bank reserves, can bypass the traditional financial system dominated by the Democratic Party, and become a new US dollar alternative tool.

The second stablecoin USDtb is jointly developed with Securitize, a well-known institution in the RWA field. It relies on BlackRock BUIDL and connects traditional financial products such as the US dollar, short-term US Treasury bonds and repurchase agreements.Creating a digital dollar with stable returns supported by real-world assets can efficiently divert funds to the US domestic industry and real economy, helping Trump's core goal of reviving industry and creating jobs.

It is worth mentioning that World Liberty Financial, led by the Trump family, although WLFI does not adopt the DAO model, its determination to promote DeFi into the mainstream financial market in the United States shows its grand vision in the field of DeFi. In the DeFi field, among the many market segments and infrastructure projects, those that can generate continuous income are particularly popular, such as the lending platform AAVE, the oracle network LINK, ONDO supported by RWA, and ENA, which promotes the crypto-native stablecoin solution. It is reported that WLFI has invested a total of US$750,000 in Ethena tokens through on-chain transactions, and announced a cooperation plan to use Ethena's income token sUSDe as a collateral asset for the WLFI lending platform.

Source: https://x.com/ethena_labs/status/1869413546225983536

 RWA from a stablecoin investment perspective 

RWA (real world assets), payments and stablecoins constitute the three core elements that are intertwined in the financial field. They can be considered as a whole in specific financial scenarios, or they can be regarded as specialized tracks with independent meanings. Among the three, the concept of payment is relatively clear, and its application scenarios are similar to those in the traditional financial world. For the other two, RWA refers to assets that are digitized through Web3 technology and transformed into transparent and easily circulated assets on the blockchain. This process covers a wide range of asset classes, including stablecoins, private credit, U.S. Treasuries, commodities, and stocks. Given that stablecoins occupy a unique and significant proportion among them, stablecoins can also be considered as an independent track. This chapter will explore the growth rate and market space of RWA and stablecoins from an investment perspective, and focus on analyzing the evolution of the stablecoin market landscape, as well as the development trajectory and challenges faced by crypto-native stablecoins. Excellent growth rate and broad prospects Combining the total asset value trend chart of RWA and stablecoins, we can intuitively grasp their market size and growth dynamics. At present, the total asset value of the RWA market is about 218.3 billion US dollars, of which the stablecoin market size has reached 203.4 billion US dollars, accounting for as high as 93.2%. The stablecoin market has grown from 30 million US dollars at the beginning of 2018 to 203.4 billion US dollars now. Such a huge growth not only reflects the strong development momentum of stablecoins, but also highlights its huge market potential. In the non-stablecoin RWA field, the total asset value has increased from 10 million US dollars in 2018 to 200 million US dollars in 2021, and then soared to the current 14.9 billion US dollars. The annual compound growth rate corresponding to this growth trend is also impressive. In this growth process, private credit and the United States have played a key role in promoting it.

RWA total market capitalization (including stablecoins)

Source: https://app.rwa.xyz/

Stablecoin market value

Source:https://app.rwa.xyz/stablecoins

RWA total market value (excluding stablecoins)

Source:https://app.rwa.xyz/

Stablecoins, as a unique and key asset class in the RWA field, deserve special attention and analysis. Before discussing, let us first briefly understand the US dollar and its related assets. With its outstanding international status, the US dollar has become a key currency for cross-border transactions, financial settlements and global investments around the world. The US dollar and its related assets, such as US Treasury bonds, play a core role in the financial market, which further consolidates the dollar's position as the world's reserve currency and makes it a symbol of global hard currency.

In the cryptocurrency market, stablecoins anchored to the US dollar have played a key role since 2018. They are not only the base currency unit for transactions, but also play the role of shadow US dollar assets, active in multiple scenarios such as transfer payments. Taking the average daily transfer volume on the chain as an example, the current daily transfer volume is stable in the high range of US$25 billion to US$30 billion, and even in the market downturn, the data is not less than US$10 billion. In terms of trading volume, according to a report by CCData, the monthly trading volume of stablecoins on centralized exchanges in November 2024 was as high as US$1.8 trillion, exceeding half of the total market value of the cryptocurrency industry. Combined with industry data from CoinMarketCap, we can estimate that the average daily trading volume in November was $200 billion, or $6 trillion per month, which means that stablecoins account for 30% of the industry's trading volume in centralized transactions. This proportion does not include the on-chain stablecoin trading volume, which means that its actual proportion may be higher. In addition to the two core indicators of trading volume and transfer volume, stablecoins also provide stable and sustainable returns by introducing stable-yield assets such as U.S. Treasury bonds as underlying assets, bringing positive externalities to the industry and further promoting the connectivity and integration of Web3 with reality.

Stablecoin daily trading volume

Source:https://studio.glassnode.com/charts/usd-transfer-volume

Stablecoin market value and trading volume

Source:https://coinmarketcap.com/charts/

Tether's profits for the first three quarters of 2024

Source:https://tether.io/news/tether-hits-7-7-billion-2024-nine-month-profits-102-5-billion-in-u-s-treasury-hold ings-almost-120-billion-usd₮-circulation-and-an-over-6-billion-reserve-buffer-in-q3-2024-attestation/

With the approval of Bitcoin and Ethereum spot ETFs in 2024, capital inflows have pushed the total market value of the cryptocurrency industry to a new high. We expect that with the growth of the industry's market value and the continuous expansion of the user base, stablecoins are also expected to break through historical highs in a number of key data indicators such as market value, transfer volume and transaction volume.

The evolution of the stablecoin market landscape

The birth of stablecoins stems from the strong demand for price stabilization tools in the cryptocurrency industry. In the early stages, mainstream cryptocurrencies such as Bitcoin and Ethereum were difficult to use as stable units of account due to their high price volatility. Stablecoins provide a relatively stable value storage and transaction medium by being pegged to fiat currencies such as the US dollar. This allows users to hold a digital asset that can withstand market fluctuations and facilitate rapid fund transfers. As the market demand for stablecoins increases, various types of stablecoins have gradually emerged, including fiat-backed stablecoins, decentralized collateralized stablecoins, algorithmic stablecoins, etc. These stablecoins provide users with a variety of choices to meet different market needs and risk preferences.

When exploring the stablecoin market, we will focus on analyzing several representative stablecoins. These include USDT issued by Tether, USDC issued by Circle, DAI/USDS issued by MakerDAO protocol, and UST, an algorithmic stablecoin issued by Terra. Through the basic analysis of these stablecoins, we can understand the characteristics of various stablecoins and their market performance.

As a stablecoin that entered the cryptocurrency market early, USDT has gained widespread market support and recognition since 2018. It has not only been accepted by many exchanges, but has also further penetrated into the primary and secondary markets, DeFi protocols, many public chains, and Layer2 after 2020. Therefore, USDT's market share has always maintained a leading position. At present, the underlying assets of USDT mainly include U.S. Treasury bonds and overnight reverse repurchases. Since the transparency of these assets is not updated in real time, USDT has experienced several de-anchoring events in history, with the largest amplitude close to 10%. Despite this, USDT still dominates the spot and derivatives trading volume of mainstream exchanges with its first-mover advantage and global applicability. Mainstream exchanges generally use USDT as the core denominated currency pair. Even if they also support other stablecoins such as USDC or FDUSD, USDT's trading volume and market depth still far exceed other stablecoins.

Tether’s 2024 Q3 Reserves Report

Source: https://tether.to/en/transparency/?tab=reports

Tether’s past transparency reports

Source:https://tether.to/en/transparency/?tab=reports

USDC is issued by Circle, a company with strong regulatory resources and multiple asset management licenses. Since its launch in October 2018, USDC has long become the second largest stablecoin in the cryptocurrency market, with a market share of approximately 20.9%. Based on its excellent compliance and transparency, the underlying assets of USDC are mainly composed of US dollar cash, short-term Treasury bonds and US overnight reverse repurchase agreements. Most of the USDC reserves are deposited in the Circle Reserve Fund (a 2a-government money market fund registered with the SEC), which provides portfolio reports through BlackRock every day to ensure transparency. At one time, the issuance of USDC was close to 77.6% of USDT, but in the bankruptcy of Silicon Valley Bank (SVB) in March 2023, Circle's approximately US$3.3 billion in USDC reserves were deposited in SVB, accounting for a small part of its total reserves of US$40 billion. This news once caused panic in the market, causing USDC prices to plummet and de-anchor, and even triggered a run. However, with the joint rescue plan of the Federal Reserve and the Treasury Department, Circle announced that SVB's deposits were 100% safe, the market panic gradually subsided, and the USDC price returned to near normal levels. After this incident, USDC's vulnerability to the risks of the traditional banking system was exposed, and its issuance volume also showed a downward trend. In order to improve the stability and transparency of USDC, Circle has implemented a series of measures. Although the market share has not recovered to its previous highs, USDC's natural compliance makes its key data indicators such as on-chain transaction volume and number of transactions still competitive with USDT.

Circle Reserve Fund

Source:https://www.blackrock.com/cash/en-us/products/329365/

DAI/USDS is a decentralized stablecoin issued and managed by MakerDAO, which aims to maintain a 1:1 fixed exchange rate with the US dollar. Initially, DAI was generated through an over-collateralization mechanism, where users can lock crypto assets (such as Ethereum) in the smart contract of the Maker protocol to generate DAI. This mechanism requires that the value of the collateral is greater than the amount of DAI generated to ensure the stability of the value of DAI. However, DAI may cause a series of liquidations when the price fluctuates violently. In addition, the openness and transparency of on-chain transactions make the liquidation line of the minter easy to become the target of targeted sniping, resulting in liquidation failures and bad debts. In order to reduce these risks, MakerDAO introduced more collateral options, such as USDC and wBTC, and established a dedicated risk management team. The decentralized nature of DAI provides unique advantages in certain application scenarios, especially in the DeFi field, where it plays a core role, not only as a medium of exchange, but also widely used in various financial activities such as lending, payment and staking. Although DAI has a smaller market share compared to centralized stablecoins such as USDT and USDC, its market value still occupies a place in the global stablecoin market.

DAI / USDS collateral list

Source:https://makerburn.com/#/rundown

UST, as a decentralized algorithmic stablecoin in the Terra ecosystem, aims to maintain a 1:1 fixed exchange rate with the US dollar. It relies on the smart contract of the Terra blockchain and uses Luna tokens as value support. Users destroy the equivalent Luna when minting UST, and exchange the equivalent Luna when destroying UST, and then maintain price stability through the behavior of market arbitrageurs. During the period of Luna price increases, the mechanism of UST can promote a positive cycle, the so-called "positive spiral" rise. However, when the price of Luna falls, UST is prone to fall into a "death spiral", that is, the price fall causes UST to depeg due to the difficulty of Luna's market value to support the market value of UST. UST once provided high returns through the Anchor Protocol to attract user deposits, thereby expanding its scale and becoming one of the main stablecoins on the market. Unfortunately, in the Terra ecosystem collapse event in May 2022, UST's price stabilization mechanism encountered serious challenges, which eventually led to its decoupling from the US dollar and its price returning to zero. This incident highlights the risks and challenges of pure algorithmic stablecoins in market confidence and algorithm design, especially under extreme market conditions, these challenges become particularly evident.

It can be seen that in the stablecoin market, fiat-backed stablecoins have occupied most of the market and the market size is growing, but it is precisely because of the emerging transaction needs in the market that decentralized stablecoins have been exploring new paths. Among them, Ethena has stood out as a leader. The USDe issued by Ethena, as a synthetic dollar, has occupied a place in the DeFi field with its innovative financial solutions. USDe is characterized by the use of advanced Delta hedging strategies to maintain its peg to the US dollar, which makes it stand out among traditional stablecoins. In addition, USD0 issued by Usual is also worthy of attention. By introducing RWA as the underlying support, this stablecoin deeply integrates the robustness of traditional financial instruments with the transparency, efficiency and composability of DeFi. With its permissionless and compliant framework, USD0 directly returns the real income from RWA to community users, demonstrating the competitiveness of new stablecoins in the market. The emergence of these emerging stablecoins not only enriches the diversity of the market, but also brings more choices and investment opportunities to users.

Core indicators of crypto-native stablecoins

We define the stablecoins mentioned above, such as USDe and USD0, that do not rely on fiat currency support, as "crypto-native stablecoins". These stablecoins include stablecoins collateralized by mainstream cryptocurrencies such as Bitcoin and Ethereum, stablecoins with algorithmically anchored prices, and stablecoins that use neutral strategies to anchor their values, etc.

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When evaluating these crypto-native stablecoins, we consider multiple dimensions, the most important of which are the stability, market capitalization, and application scenarios of the stablecoin (including DeFi integration and support from centralized exchanges).

Stability is a key indicator for measuring the value of a stablecoin. The core value of a stablecoin lies in the stability of its value, that is, the ability to maintain a stable exchange rate with the anchored asset. If a stablecoin cannot maintain this anchoring relationship, its "stable" characteristics will be questioned, thereby losing its basic function as a stablecoin.

On the premise of ensuring the stability of the stablecoin price anchor, the stablecoin must reach a certain market scale to become a mainstream currency and then occupy a place in the financial ecosystem. If a stablecoin cannot achieve scale expansion, its influence and practicality will be limited, and it will be difficult to have a significant impact in the highly competitive market.

The market size of stablecoins depends on the breadth of their application scenarios. Stablecoins that lack actual application scenarios will find it difficult to consolidate their market position no matter how large their market value is, just like a tree without roots. Therefore, stablecoins must do everything they can to obtain a wider user base and diversified application scenarios as much as possible to ensure the stability of their value and the enhancement of their liquidity.

 Why we invest in Ethena 

Ethena's vision is to promote the prosperity of the next generation of Internet finance by reshaping the cryptocurrency system and building a bridge between DeFi, CeFi and TradFi. Its first stablecoin USDe has been deeply integrated in many key areas of DeFi, including money markets, leveraged collateral in derivatives markets, stablecoin infrastructure, interest rate swap agreements, and spot AMM DEX. In the exchange field, Ethena's liquidity pool not only provides support for existing centralized and decentralized trading platforms, but also helps emerging exchanges solve liquidity problems in the early stages of their launch, becoming the market's leading provider of deep and over-the-counter liquidity. For TradFi, Ethena's USDe is favored for its unique returns. The stablecoin combines the local real returns of two billion-dollar cryptocurrencies, and its returns are weakly negatively correlated with traditional financial interest rates. The underlying assets are held by TradFi-approved custodians. USDe provides a convenient way for large investors to obtain excess returns in the cryptocurrency market through a single asset. With the decline in real interest rates, the growth of market speculation and leverage demand for cryptocurrencies is expected to further push up Ethena's USDe returns, making it an important driving force for attracting trillion-dollar TradFi entities to invest in the Ethena ecosystem.

Delta-neutral synthetic USDe

The USDe stablecoin launched by Ethena, as a crypto-native asset, is different from the US dollar stablecoin that relies on traditional assets such as US Treasury bonds as the underlying support. Its issuance mechanism involves holding mainstream cryptocurrency spot and establishing short positions on exchanges. This innovative model of stablecoin plays an important role in the market, not only locking in the value of mainstream crypto assets, but also injecting liquidity into the derivatives market. Especially during the bull market, as the price of mainstream assets rises and the scale of derivatives contracts expands, the scale of USDe also grows. In addition, the short funding rate of USDe provides holders with a more attractive yield than traditional stablecoins such as USDT. This advantage has attracted more users to choose USDe, further promoting the expansion of USDe.

Minting, Redemption and Staking

The minting process of USDe allows users to exchange USDe by sending underlying assets to the protocol, while redemption is the user destroying USDe to redeem the original supporting assets. Staking USDe enables users to lock USDe in smart contracts to obtain returns. When users stake USDe, they receive sUSDe, whose value increases as the protocol's earnings accumulate. Users can unstake sUSDe at any time to obtain USDe with accumulated value.

Delta Neutral Anchoring Mechanism

USDe's anchoring mechanism mainly achieves stability relative to its underlying supporting assets by executing automated and programmed Delta neutral hedging strategies. This strategy offsets the risk of spot asset price changes by establishing short positions in the derivatives market that are equal to the spot asset, thereby keeping the synthetic dollar value of USDe relatively stable under most market conditions. In addition, the Ethena protocol's revenue sources, including spot pledge income and funding rate income from short positions, further enhance USDe's stability. Through this series of mechanisms, USDe can become a reliable medium of exchange and value storage tool in the crypto market, maintaining a stable peg to the US dollar.

Hedging strategy and risk control

Ethena's hedging mechanism is a system composed of off-chain application services that interact with on-chain smart contracts and the Ethereum blockchain, responsible for obtaining market data, verifying data integrity, calculating risk exposure, coordinating internal system information, publishing prices for minting and redeeming USDe, determining order routing and execution locations, verifying the integrity of information and operations in real time, monitoring the availability of dependencies, coordinating collateral flows, and publishing real-time developments. The system focuses on protecting protocol collateral to ensure the stability of USDe and the real-time integrity of the system. In addition, Ethena has a deep understanding of various potential risks, including smart contract risk, external platform risk, liquidity risk, custody operation risk, exchange counterparty risk, and market risk. To address these challenges, Ethena has taken proactive measures to mitigate and diversify these risks to enhance the robustness and reliability of the entire system.

Transparency and Fund Security

The core value of stablecoins lies in their ability to anchor, that is, to maintain the stability of the value of the fiat currency to which they are linked. Historically, some stablecoins such as USDT and USDC have experienced de-anchoring due to insufficient transparency and imperfect risk control mechanisms. To this end, Ethena has ensured the stability and transparency of its asset management by adopting a multi-signature and asset custody mechanism, as well as in-depth cooperation with exchanges. In addition, in order to cope with rate fluctuations in extreme market conditions, Ethena has established sufficient reserve funds. This series of strategies not only enhances the credibility of USDe, but also provides solid security for USDe's earnings, ensuring the interests of holders and the stability of the market.

TradFi-friendly digital dollar USDtb

USDtb is an institutional-grade stablecoin, backed by BlackRock's BUIDL, the world's largest asset management company, and backed by high-quality short-term government bonds, ensuring its excellent security and trust. In the DeFi field, USDtb is not only fully accessible and easy to integrate, but also can be used as collateral in centralized exchanges and major brokers, providing traditional financial institutions with direct access to DeFi. In addition, USDtb also has a unique on-chain direct minting and redemption mechanism, which enables 24-hour service and further enhances its competitiveness and convenience in the digital asset market.

As a product independent of USDe, USDtb provides users with a new option with very different risk characteristics. Its existence enables USDe to respond to market challenges more effectively, especially during periods of negative funding rates, when Ethena can close USDe's hedging positions and reallocate assets to USDtb, thereby mitigating related risks and enhancing the stability and risk resistance of the entire system.

ENA Token Design

The ENA token plays a key role in the Ethena ecosystem, both as a governance token that gives holders the right to participate in key decisions, such as electing risk committee members and shaping policy direction, and as an opportunity to stake sENA for additional returns. With ENA being used as a voting tool on the Ethereal derivatives exchange in the future, its importance in the Ethena development blueprint is becoming increasingly prominent. These functions not only consolidate ENA's position as the core of the Ethena protocol, but are also essential to maintaining the protocol's decentralized governance and incentivizing user participation.

In terms of liquidity, ENA has performed well on major exchanges and its trading volume continues to rank among the top, which not only proves the market activity of the Ethena protocol, but also shows that it has been widely recognized and accepted by the market.

Operational Resources

Ethena has implemented a series of hedging strategies to deal with emergencies in derivatives markets such as contracts through in-depth cooperation with major well-known exchanges, ensuring the stability and security of USDe. In addition, the use of USDe as a trading denominated currency pair is also gradually being implemented, thanks to Ethena's efforts to increase liquidity to mitigate risks. In terms of resources, Ethena cooperates with several of the world's top market makers, which provide it with liquidity and market depth, further enhancing the market adaptability and resilience of USDe.

Source:https://ethena.fi/ecosystem

 The future prospects of Ethena

In the field of stablecoins, the competitive landscape is far from certain. Although USDT and USDC occupy a leading position, emerging competitors are fully capable of challenging their market position. The key is to choose stablecoin protocols that have unique mechanisms, can stabilize the value, increase market value and expand application scenarios. Just as DEX has occupied 10% of CEX trading volume, decentralized financial products are rapidly occupying market resources because of their verifiability and convenience. We expect that in 2025, decentralized stablecoins represented by Ethena will continue to grow in market size and reach a market share of 10%, or US$20 billion.

At the same time, we believe that Ethena will become one of the important financial tools for the implementation of Trump's policies. The implementation of Trump's policies will also promote Ethena's strategic position in the US economic revival and global financial reshaping, and become an important support for the US and global digital financial ecology. As an industry pioneer, ArkStream Capital will work with Ethena to witness the great changes in this era of decentralized finance.

 Reference materials 

Official documentation: https://docs.ethena.fi/

USDtb: https://usdtb.money/

BlackRock BUILD: https://securitize.io/learn/press/blackrock-launches-first-tokenized-fund-buidl-on-the-ethereum-network

USDtb as USDe Proposal for Backing Assets and Eligible Assets for the Reserve Fund: https://gov.ethenafoundation.com/t/proposal-usdtb-as-a-usde-backing-asset-and-eligible-asset-for-the-reserve-fund/385 Transparency on USDtb: https://usdtb.money/transparency BlackRock BUILD: https://intel.arkm.com/explorer/address/0x13e003a57432062e4EdA204F687bE80139AD622f

https://intel.arkm.com/explorer/entity/blackrock

BlackRock BUILD: https://etherscan.io/token/0x7712c34205737192402172409a8f7ccef8aa2aec

BlackRock BUILD: https://app.rwa.xyz/assets/BUIDL

Stablecoin trading volume in November: https://cointelegraph.com/news/stablecoin-trading-volume-surges-1-8-t-november

Ethena FAQs: https://www.notion.so/ethena/Ethena-FAQs-3ccc1437e13343f8b74c0d005e4f5128?pvs=4

Ethena Chartbook: https://ethena.notion.site/Ethena-Chartbook-c35c316346ee4c7e97aff49a9eadd87e

Ethena 2024 Roadmap: https://mirror.xyz/0x29a99F7Fe080F72223dAd48D5E1E86670a984326/odrjQynMr3PrtRhCzHa2k7tcdNIpibJLyRe7yXY944Q

Dust on Crust Part Deux: https://cryptohayes.medium.com/dust-on-crust-part-deux-85a4670239d6

Circle: https://www.circle.com/usdc

Tether: https://tether.to/