Is Ethena a systemic risk or a savior for Decentralized Finance?

Ethena's rise in the decentralized finance space sparked widespread follow-up, with its total lock-up soaring from less than $10 million to $5.5 billion. This article explores how Ethena works, the potential risks, and its impact on the entire Decentralized Finance ecosystem. This article is from DC | Articles by In SF, compiled and compiled by Block unicorn. (Synopsis: The Trump family increases the position Decentralized Finance again!) Buy ONDO, AAVE, ENAToken, position exceeded 80 million magnesium) (Background added: Opinion" Why is Ethena a real big opportunity? Ethena has significantly increased the usage of Decentralized Finance as a whole with a multibillion-dollar rise, similar to the impact of stETH on Ethereum Decentralized Finance. Ethena is one of the most successful protocols in the history of Decentralized Finance. About a year ago, its total lock-up (TVL) was less than $10 million, and today it has risen to $5.5 billion. It is integrated into multiple protocols in various ways, such as @aave, @SkyEcosystem (IE Maker/Sparklend), @MorphoLabs, @pendle_fi, and @eigenlayer. There were so many protocols with Ethena that I had to change the cover several times when recalling another partner. Six of the top 10 TVL protocols work with Ethena or are Ethena itself (Ethena ranks ninth). If Ethena fails, this will have a profound impact on many protocols, especially AAVE, Morpho, and Maker, which will fall into varying degrees of functional insolvency. At the same time, Ethena has significantly increased the use of Decentralized Finance as a whole through a multibillion-dollar rise, similar to the impact of stETH on Ethereum Decentralized Finance. So is Ethena destined to destroy Decentralized Finance as we know it, or is it bringing Decentralized Finance into a new Renaissance? Let's dive into this issue. How exactly does Ethena work? Despite being launched for more than a year, there are still common misconceptions about how Ethena works. Many claim it is the new Luna and then refuse to elaborate further. As someone who has warned Luna, I find this view very one-sided, but I also believe that most people don't have enough understanding of the details of how Ethena works. If you think you fully understand how Ethena manages Delta neutral parts, escrow, and redemptions, skip this section or this is important reading to fully understand. Overall, Ethena, like BTC, has benefited from financial speculation and cryptocurrency bull markets, but in a more stable way. As the price of cryptocurrency rises, more and more traders want Long BTC and ETH, while fewer and fewer are willing to Short. Due to supply and demand, Short's traders are paid by Long's traders. This means that traders can hold BTC while Short the same amount of BTC, thus achieving a neutral position, that is, when the price of BTC rises, the profit and loss of long and short positions cancel each other out, while the trader can still earn Intrerest Rate income. Ethena operates entirely on this mechanism; It takes advantage of the lack of sophisticated investors in the encryption market who prefer to profit by earning yield rather than simply Long BTC or ETH. However, a significant risk to this strategy lies in the hosting risk of the exchange, which was reflected in the collapse of FTX and its impact on the first generation of Delta-neutral managers. Once the Exchange goes out of business, all funds may be lost. That's why it's not their fault that mainstream managers, who managed their capital efficiently and safely, were greatly negatively impacted by the collapse of the FTX, the most obvious example being @galoiscapital. Exchange risk was one of the big reasons Ethena chose to use @CopperHQ and @CeffuGlobal. These custodial service providers act as trusted middlemans to hold assets and assist Ethena in interacting with the exchange while avoiding the custodial risks of exposing Ethena to the exchange. Exchange can in turn rely on Copper and Ceffu because they have legal agreements with custodians. Total P&L (i.e., the amount Ethena needs to pay to Long traders, or the amount Long traders owe Ethena) is periodically settled by Copper and Ceffu, and Ethena systematically rebalances its positions based on these settlement results. This hosting arrangement effectively removes the risks associated with Exchange while ensuring the stability and sustainability of the system. mint and redemption USDe/sUSDe are relatively simple. USDC or mint USDe can be purchased using USDC or other major assets. USDe can be staken to generate sUSDe, and sUSDe earns revenue. sUSDe can then be sold to the market by paying the corresponding swap fee, or USDe can be redeemed. The redemption process usually takes seven days. USDe can then be converted into a backing asset at a 1:1 ratio (corresponding to the value of $1). These supporting assets come from asset reserves and the Collaterals used by Ethena (mainly BTC and ETH/ETH's Derivatives). Given that some USDe is not staken (many of which are used for Pendle or AAVE), the gains generated by the assets supporting these non-stake USDe have helped to enhance the returns of sUSDe. To date, Ethena has been able to process large withdrawals and deposits with relative ease, although sometimes the USDe-USDC Slippage is as high as 0.30%, which is relatively high for stablecoins, but far from reaching significant depeg levels and far from being dangerous to lending protocols, so why are people so worried? Well, if there is a large withdrawal demand, let's say 50% how to make Ethena "fail"? Given that we now understand that Ethena's earnings are not "fake" and how it works on a more nuanced level, what are Ethena's main real concerns? Basically, there are the following situations. First, the Money Intrerest Rate could turn negative, in which case Ethena's insurance fund (currently around $50 million, enough to withstand the 1% Slippage/Money loss under the current TVL) is not enough to cover the losses, Ethena will end up losing money instead of making a profit. This seems relatively unlikely, as most users will probably stop using USDe when they earn drops, as has happened in the past. Another risk is custody risk, which is the risk that Copper or Ceffu is trying to operate with Ethena's money. This risk is mitigated by the fact that the custodian does not have full control over the assets. Exchange doesn't have signing permissions and can't control any Wallet that holds the underlying assets. Cop...