ArkStream Capital: Why we invested in Ethena after Trump took office

Original article by: Ray, ArkStream Capital

The beginning of a new era of strategic investment: Ethena

On November 5, 2024, Trump successfully won the US election. This result marks that the United States is about to usher in an economic transformation led by traditional industry and decentralized finance. The core of Trumps 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 ArkStreams heavily invested projects, Ethenas 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 加密貨幣-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 various 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, was 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 to create a digital dollar supported by stable returns from real-world assets. It can efficiently direct funds to the domestic US industry and real economy, helping Trump achieve his core goal of reviving industry and creating jobs.

It is worth mentioning that World Liberty Financial, which is 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 field of DeFi, among many market segments and infrastructure projects, those that can generate sustained income are particularly concerned, 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 Ethenas income token sUSDe as a collateral asset for the WLFI lending platform.

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

RWA’s Stablecoin Investment Perspective

RWA (real world assets), payments, and stablecoins constitute 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 easy-to-circulate 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 value (including stablecoins)

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

穩定幣 市場 帽子

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 US dollars position as the worlds 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 has not been less than US$10 billion. In terms of trading volume, according to the CCData report, 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 the industry data of CoinMarketCap, we can estimate that the average daily trading volume in November was US$200 billion, or a monthly trading volume of US$6 trillion, which means that stablecoins account for 30% of the industrys trading volume in centralized trading. This proportion does not include the trading volume of stablecoins on the chain, which means that its actual proportion may be higher. In addition to the two core indicators of transaction 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 Cap and Trading Volume

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

Tether’s profit in the first three quarters of 2024

Source: https://tether.io/news/tether-hits-7-7-billion-2024-nine-month-profits-102-5-billion-in-us-treasury-holdings-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 industrys 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 linked 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, and algorithmic stablecoins. 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 an early stablecoin to enter the cryptocurrency market, USDT has gained wide market support and recognition since 2018. It has not only been accepted by many exchanges, but also further penetrated into the primary and secondary markets, DeFi protocols, many public chains and Layer 2 after 2020. Therefore, USDTs market share has always maintained a leading position. At present, the underlying assets of USDT mainly include US Treasury bonds and overnight reverse repurchases. Since the transparency of these assets is not updated in real time, USDT has experienced several depegging 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, USDTs 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 about 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 2 a-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, Circles approximately $3.3 billion USDC reserves were deposited in SVB, accounting for a small part of its total reserves of $40 billion. This news once caused market panic, causing the price of USDC 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 SVBs deposits were 100% safe, the market panic gradually subsided, and the price of USDC returned to near normal levels. After this incident, USDCs 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, USDCs 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 fixed exchange rate of 1:1 with the US dollar. Initially, DAI was generated through an overcollateralization 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. 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 field of DeFi, 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 capitalization 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 fixed exchange rate of 1:1 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 rise in Luna prices, USTs mechanism can promote a positive cycle, the so-called positive spiral rise. However, when Luna prices fall, because Lunas market value is difficult to support USTs market value, UST is prone to fall into a death spiral, that is, the price drop causes UST to decouple. 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, USTs 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 purely algorithmic stablecoins in terms of market confidence and algorithm design, which become particularly evident under extreme market conditions.

It can be seen that in the stablecoin market, fiat-backed stablecoins have occupied most of the market and the market size is growing. However, 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. 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, USD 0 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. USD 0, with its permissionless and compliant framework, 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

我們 去中心化金融ne the stablecoins mentioned above, such as USDe and USD 0, 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 with neutral strategy anchored values.

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

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

On the premise of ensuring the price of stablecoins is stable, stablecoins must reach a certain market size to become mainstream currencies and 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 a 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 gain a wider user base and diversified application scenarios to ensure the stability of their value and the enhancement of their liquidity.

Why we invested in Ethena

Ethenas vision is to build a bridge between DeFi, CeFi and TradFi by reshaping the cryptocurrency system to promote the prosperity of the next generation of Internet finance. Its first stablecoin USDe has achieved deep integration in multiple 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, Ethenas liquidity pool not only supports existing centralized and decentralized trading platforms, but also helps emerging exchanges solve the liquidity problems in the early stages of their launch and become the markets leading deep and over-the-counter liquidity provider. For TradFi, Ethenas 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. As real interest rates fall, market speculation and leverage demand for cryptocurrencies grow, which is expected to further push up Ethena’s USDe yields, making it an important driving force for attracting trillion-dollar TradFi entities to invest in the Ethena ecosystem.

Delta Neutral Synthetic USDe

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 prices of mainstream assets rose and the scale of derivatives contracts expanded, the scale of USDe also grew. In addition, USDes short funding rate 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 USDes scale.

Minting, Redemption and Staking

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

Delta Neutral Anchoring Mechanism

USDes anchoring mechanism mainly achieves stability relative to its underlying supporting assets by executing an automated and programmed Delta neutral hedging strategy. This strategy offsets the risk of spot asset price changes by establishing a short position in the derivatives market that is equal to the spot asset, thereby keeping the synthetic dollar value of USDe relatively stable under most market conditions. In addition, the Ethena protocols revenue sources, including spot staking income and funding rate income from short positions, further enhance USDes 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 strategies and risk control

Ethenas hedging mechanism is a system of off-chain application services that interact with on-chain smart contracts and the Ethereum blockchain. It is 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. In response to these challenges, Ethena actively takes measures to mitigate and diversify these risks to enhance the robustness and reliability of the entire system.

Transparency and financial security

The core value of stablecoins lies in their anchoring ability, that is, maintaining 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 ensures 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, Ethena has established sufficient reserve funds to cope with rate fluctuations in extreme market conditions. This series of strategies not only enhances the credibility of USDe, but also provides solid security for USDes earnings, ensuring the interests of holders and the stability of the market.

USDtb, a TradFi-friendly digital dollar

USDtb is an institutional-grade stablecoin, backed by BlackRocks BUIDL, the worlds largest asset management company, and backed by high-quality short-term government bonds, ensuring its superior security and trust. In the DeFi space, USDtb is not only fully accessible and easy to integrate, but can also 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, enabling 24/7 service, further enhancing its competitiveness and convenience in the digital asset market.

As a product independent of USDe, USDtb provides users with a new option with a very different risk profile. 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.

埃納 代幣 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 for the Ethereal derivatives exchange in the future, its importance in the Ethena development blueprint is becoming increasingly prominent. These features not only consolidate ENAs position as the core of the Ethena protocol, but are also essential to maintaining the protocols decentralized governance and incentivizing user participation.

In terms of liquidity, ENA has performed well on mainstream 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

Through in-depth cooperation with major well-known exchanges, Ethena has implemented a series of hedging strategies to deal with emergencies in the derivatives market such as contracts, 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 Ethenas efforts to increase liquidity to mitigate risks. In terms of resources, Ethena cooperates with many of the worlds top market makers, who provide it with liquidity and market depth, further enhancing USDes market adaptability and resilience.

Source: https://ethena.fi/ecosystem

The future 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 anchor 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 Trumps policies. The implementation of Trumps policies will also promote Ethenas 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.

This article is sourced from the internet: ArkStream Capital: Why we invested in Ethena after Trump took office

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