Author: Jack Inabinet, Bankless; Compiled by: Whitewater, Golden Finance

Ethena dominated DeFi in 2024, and although its synthetic dollar received a lot of criticism and attention at launch, it has since As traders flock to the protocol, the team's efforts have become one of DeFi's most high-profile success stories this year.

There are signs that the basis trading tokenization game is just getting started as other DeFi players look to capture Ethena’s growth prospects.

The market froth has significantly increased Ethena’s revenue in recent months and transformed ENA into a top-performing cryptocurrency company.

Today, we explore Ethena’s success story in 2024.

Ethena received its first public fundraising on February 19, and within a month of the mainnet launch, USDe’s circulating supply had exceeded all but five of its stablecoin competitors. All stablecoin competitors except.

Thanks to its sizable airdrop incentives and timely entry into the hottest financing rate environment of the year, USDe supply expanded unrestricted to $2.39 billion by mid-April, and then due to the excitement of the ENA airdrop weakened and the cryptocurrency market cooled and came to a standstill.

Although Ethena subsequently decided to reduce the insurance fund occupancy rate on May 16, which temporarily revived USDe and led to a 50% expansion of one-month supply, the continued compression of funding rates throughout the third quarter took its toll. . By September, the increase in USDe supply had completely reversed, with ENA prices down 86% from their post-issuance highs.

While the funding rate arbitrage strategy adopted by Ethena has long been possible for any trader familiar with futures, the problem is that the funds to collateralize these transactions must be locked on the exchange (either in CeFi or DeFi), which makes them impossible to lock.

Through Ethena’s approach, this underlying trading position itself becomes “tokenized” and represented in USDe, allowing traders to earn additional income in DeFi or borrow against their holdings .

While third-party applications were initially hesitant to quickly incorporate USDe collateral, Ethena’s synthetic USD now dominates the crypto credit market due to simple yield economics.

Income providers that are unable to compete with Ethena's market-leading returns may face the risk of reduced deposits or excessive borrowing demands. This dangerous dynamic could algorithmically set borrowing rates well above market value, forcing many DeFi lending markets to go on a buying spree when funding rates surged again in November.Billion dollars in U.S. dollar derivatives collateral.

In just a few weeks, Aave sUSDe’s deposit cap soared to $1 billion (at the beginning of November, its lending market held a measly $20 million in Ethena collateral). Meanwhile, MakerDAO and other lenders on Morpho are taking in $1.2 billion in exposure to the extremely illiquid Pendle sUSDe primary token (PT) at an extremely high 91.5% maximum leverage.

Ethena’s asset is now intertwined with blue-chip DeFi and ENA is interested in it, having an impressive rebound of more than 500% from the September lows, eventually settling not far from the post-launch highs .

While a negative funding rate environment is a known risk that could result in losses for USDe, many cryptocurrency observers are optimistic that Ethena’s recently deployed U.S. Treasury bond product (USDtb) could become a suitable underlying trading alternative, Establish a yield floor for Ethena savers.

Having said that, funding rates are inherently unstable, and there is significant uncertainty about how Ethena will appropriately respond to a long-term negative funding rate scenario. If losses must be realized to convert existing synthetic USD exposure to Treasury collateral, USDe investors may begin to preemptively sell tokens to avoid additional losses, leading to further redemptions, which may result in USDe being forced to liquidate Or trigger a crisis of trust in the entire market. Position closing occurs in quiet markets where hedging demand is high (i.e. during a market downturn).

At its core, Ethena is an unregulated tokenized hedge fund. Despite the huge success of its basis trade in the fourth quarter of 2024, investors should still consider the protocol's various unknowns that could create problems if funding rates change.