In-depth Analysis of the Ethena Protocol: Challenges of Funding Rate and Strategic Adjustments

The Ethena protocol is an innovative stablecoin project based on Ethereum, which introduces a "synthetic dollar" named USDe through a Delta neutral strategy. Its core mechanism allows users to deposit stETH to mint an equivalent amount of USDe, while the protocol utilizes an over-the-counter settlement solution to map the stETH balance to centralized exchanges as collateral, shorting the corresponding amount of ETH perpetual contracts to achieve Delta neutrality, theoretically ensuring the stable value of USDe.

As of May 9, 2024, the annualized yield for holding sUSDe is 15.3%, with a total issuance of USDe reaching $2.29 billion, accounting for approximately 1.43% of the stablecoin market, ranking fifth.

The收益 of Ethena mainly comes from two aspects: spot staking收益 and the funding rate收益 from short positions. The funding rate is a mechanism used in perpetual contracts to adjust the relationship between futures and spot prices. When the price of the perpetual contract is higher than the spot price, the long position pays the short position; conversely, the opposite is true. In the current bull market environment, the strong long sentiment has led to the funding rate maintaining a high level for a long time, bringing substantial收益 to Ethena.

However, with the introduction of BTC as collateral, staking yields have been diluted, market sentiment has stabilized, and due to the impact of a large number of short positions in Ethena, the funding rate yield has decreased. Currently, the yield of sUSDe has dropped from over 30% to around 10%.

The main challenges faced by Ethena include:

1. Insufficient insurance fund reserves: The current insurance fund accounts for only 1.66% of the USDe issuance, which is far below the expectations of the official model and may affect user confidence and project stability.

2. The dilution of returns brought by collateral diversification: Introducing non-staked assets such as BTC as collateral increases liquidity but also dilutes the overall return rate.

3. The total open contract limit in the market: The issuance of USDe is restricted by the total open contract volume of ETH and BTC perpetual contracts in the market. Currently, Ethena's market share in the ETH and BTC markets has reached 13.77% and 4.71%, respectively.

4. Lack of application scenarios: USDe is currently mainly used to obtain high APY and participate in airdrop activities, with a lack of practical application scenarios, which may affect long-term development.

In the face of these challenges, Ethena may need to adopt the following strategies:

1. Accelerate the replenishment of the insurance fund to enhance user confidence.
2. Develop more application scenarios for USDe to enhance its practicality.
3. Continue to introduce high-quality collateral, diversify risks, and increase the supply limit of USDe.
4. Optimize the funding rate strategy to maintain competitiveness during changes in market sentiment.

Although Ethena seems to have a natural advantage in coping with bank runs in a negative funding rate environment, a sufficient insurance fund remains key to ensuring the protocol's stable operation. In the future, Ethena needs to seek a balance between scaling, increasing returns, and controlling risks to maintain its competitiveness in the stablecoin market.