ArkStream Capital: Why We Invested in Ethena After Trump Took Office

Original author: Ray, ArkStream Capital

Strategic Investment in the New Era Prelude Ethena

On November 5, 2024, Trump successfully won the U.S. presidential election, marking the beginning of an economic transformation in the United States led by traditional industries and decentralized finance. The core of Trump’s policies is to break the shackles of the U.S. dollar hegemony on the domestic economy, revive the industrial economy, and weaken the excessive control of the Democratic Party and its financial capital over the U.S. economy. In early November, ArkStream Capital keenly recognized the crucial role played by Ethena (ENA) in this historic moment and strategically invested 5 million U.S. dollars in Ethena. As one of ArkStream’s major investment projects, Ethena has performed as expected 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 solutions for native cryptocurrencies. Its first stablecoin is the native synthetic US dollar, USDe, and the core innovation is to maintain intrinsic stability by holding a variety of mainstream cryptocurrencies’ spot and corresponding short positions through the use of Delta hedging strategies. This design does not rely on traditional US dollar bank reserves and can bypass the traditional financial system dominated by the Democratic Party, becoming a new tool to replace the US dollar.

The second stablecoin USDtb is jointly developed with Securitize, a well-known institution in the RWA field, relying on BlackRock BUIDL to connect traditional financial products such as the US dollar, short-term US government bonds, and repurchase agreements. It aims to create a digital dollar supported by real-world asset stable income, efficiently channeling funds to the local industry and real economy in the United States, and helping to achieve Trump’s core goal of revitalizing industry and creating jobs.

It is worth mentioning that World Liberty Financial, led by the Trump family, has shown its grand vision in the DeFi field by promoting the entry of DeFi into the mainstream financial market in the United States, although WLFI does not adopt the DAO model. In the DeFi field, projects that can generate sustainable income are particularly concerned, such as the lending platform AAVE, the oracle network LINK, the ONDO supported by RWA, and the ENA that promotes the encrypted native stablecoin solution. It is reported that WLFI has accumulated a total investment of $750,000 in Ethena tokens through on-chain transactions and announced cooperation, planning to use Ethena’s income-based token sUSDe as collateral assets for WLFI’s lending platform.

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Stablecoin Investment Perspective on RWA

RWA (Real World Assets), payments, and stablecoins constitute the three intertwined core elements in the financial sector. They can be considered as a whole in specific financial scenarios, or as specialized tracks with independent meanings. Among these three, the concept of payments is relatively clear, with application scenarios similar to the traditional financial world. The other two, RWA refers to assets that are digitized through Web3 technology and transformed into transparent and easily tradable assets on the blockchain. This process covers a diverse range of asset classes, including stablecoins, private credit, US treasuries, commodities, and stocks, among others. Given the significant proportion of stablecoins, they 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, focusing on the evolution of the stablecoin market landscape, the development trajectory of native crypto stablecoins, and the challenges they face.

Excellent growth rate and broad prospects

By combining the trend chart of the total asset value of RWA and stablecoins, we can intuitively grasp their market size and growth dynamics. Currently, the total asset value of the RWA market is about 218.3 billion USD, with the market size of stablecoins reaching 203.4 billion USD, accounting for a high proportion of 93.2%. The market size of stablecoins has grown from 30 million USD in early 2018 to the current 203.4 billion USD, such tremendous growth not only reflects the strong development momentum of stablecoins, but also highlights their huge market potential. In the non-stablecoin RWA field, the total asset value has grown from 10 million USD in 2018 to 200 million USD in 2021, and further surged to the current 14.9 billion USD. The corresponding compound annual growth rate of this growth trend is also impressive. Private credit and the United States have played a key role in this growth process.

Total Market Value of RWA (including stablecoins)

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Stablecoin Market Cap

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RWA Total Market Cap (excluding stablecoins)

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Stablecoins, as a unique and critical asset class in the RWA field, deserve special attention and analysis. Before discussing, let’s 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 worldwide. The US dollar and its related assets, such as US Treasury bonds, play a core role in the financial markets, further consolidating the US dollar’s status as a global reserve currency and making it a symbol of global hard currency.

Stablecoins pegged to the US dollar have played a key role in the cryptocurrency market since 2018. They not only serve as the benchmark currency unit for trading, but also play a role as shadow US dollar assets, active in multiple scenarios such as transfer payments. Taking the daily on-chain transfer volume as an example, the current daily transfer volume is stable in the high range of 25 billion to 30 billion US dollars. Even in the period of market downturn, this data has not been lower than 10 billion US dollars. In terms of trading volume, according to CCData’s report, the monthly trading volume of stablecoins on centralized exchanges will reach as high as 1.8 trillion US dollars in November 2024, exceeding half of the total market value of the cryptocurrency industry. Combining CoinMarketCap’s industry data, we can estimate that the daily average trading volume in November is 200 billion US dollars, with a monthly trading volume of 6 trillion US dollars. This means that stablecoins account for 30% of the industry’s trading volume on centralized exchanges. This ratio does not yet include the on-chain stablecoin trading volume, which means its actual proportion may be higher. In addition to the two core indicators of trading and transfer volume, stablecoins also provide stable and sustainable income by introducing assets such as US Treasury bonds as underlying assets, bringing positive externalities to the industry and further promoting the connection and integration between Web3 and reality.

Stablecoin daily trading volume

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Stablecoin market capitalization and trading volume

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Tether’s profit for the first three quarters of 2024

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With the approval of Bitcoin and Ethereum spot ETFs in 2024, capital inflows are driving the total market value of the cryptocurrency industry to a new high. We expect that with the growth of industry market value and the continuous expansion of user base, stablecoins are also expected to break historical highs in market value, transfer volume, and trading volume, among many key data indicators.

Evolution of Stablecoin Market Structure

The birth of stablecoins stems from the strong demand for price stability tools in the cryptocurrency industry. In the early stages, mainstream cryptocurrencies such as Bitcoin and Ethereum were difficult to use as stable pricing units due to their price volatility. Stablecoins, pegged to fiat currencies such as the US dollar, provide a relatively stable value store and medium of exchange. This allows users to hold a digital asset that can withstand market fluctuations and facilitate rapid fund transfers. With the increasing demand for stablecoins, various types of stablecoins have gradually emerged, including fiat-backed stablecoins, decentralized collateralized stablecoins, algorithmic stablecoins, etc. These stablecoins provide users with diverse 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 algorithmic stablecoin UST issued by Terra. Understand the characteristics and market performance of various stablecoins through basic analysis of these stablecoins.

USDT, as one of the early stablecoins to enter the cryptocurrency market, has gained wide market support and recognition since 2018. It has been adopted by numerous exchanges and further penetrated into the primary and secondary markets, DeFi protocols, numerous public chains, and Layer 2 after 2020. Therefore, USDT has always maintained a leading position in market share. Currently, the underlying assets of USDT mainly include US Treasury bonds and overnight repurchase agreements. Due to the non-real-time update of these assets’ transparency, USDT has experienced several instances of significant deviation in the past, with the largest deviation approaching nearly 10%. Nevertheless, with its first-mover advantage and global applicability, USDT still dominates the trading volume of spot and derivative products on mainstream exchanges. Mainstream exchanges generally use USDT as the core pricing currency pair, even though they also support other stablecoins such as USDC or FDUSD, the trading volume and market depth of USDT still far exceed other stablecoins.

Tether’s Q3 2024 Reserves Report

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Tether’s transparency report in the past

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USDC, issued by Circle, a company with strong regulatory resources and multiple asset management licenses. Since its launch in October 2018, USDC has long been the second largest stablecoin in the cryptocurrency market, with a market share of about 20.9%. Based on its outstanding compliance and transparency, the underlying assets of USDC mainly consist of US dollar cash, short-term government bonds, and US overnight repurchase agreements. Most of the USDC reserves are held in the Circle Reserve Fund (registered with the SEC as a 2a- government money market fund), which provides investment portfolio reports daily through BlackRock to ensure transparency. At one point, the circulation of USDC once approached 77.6% of USDT, but in the March 2023 Silicon Valley Bank (SVB) bankruptcy event, Circle had about $3.3 billion of USDC reserves stored at SVB, accounting for a small portion of its $40 billion total reserves. This news once triggered market panic, leading to a sharp drop in USDC prices and unanchoring, even triggering a run. However, with the joint market rescue plan of the Federal Reserve and the Treasury Department, Circle announced that the deposits with SVB are 100% safe, and the market panic gradually subsided, and the USDC price also returned to near normal levels. After this incident, the vulnerability of USDC in the face of traditional banking system risks was exposed, and its circulation also showed a downward trend. In order to enhance the stability and transparency of USDC, Circle has implemented a series of measures. Despite the inability to recover to its previous high point in market share, the natural compliance of USDC makes its key on-chain transaction volume and transaction count data still competitive with USDT.

Circle Reserve Fund

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DAI/USDS is a decentralized stablecoin issued and managed by MakerDAO, designed to maintain a fixed exchange rate of 1:1 with the US dollar. Initially, DAI is generated through an over-collateralization mechanism, where users can lock in crypto assets (such as Ethereum) as collateral in the smart contracts of the Maker protocol to generate DAI. This mechanism requires the value of the collateral to be greater than the amount of DAI generated to ensure the stability of DAI’s value. However, during periods of price volatility, DAI may be subject to cascading liquidations. The transparency of on-chain transactions makes it easy for liquidators to target the liquidation price of minters, resulting in failed liquidations and bad debts. To mitigate these risks, MakerDAO has introduced additional collateral options such as USDC and wBTC, and established a dedicated risk management team. The decentralized nature of DAI provides unique advantages in certain applications, particularly in the DeFi space where it plays a central role, not only as a medium of exchange but also widely used in lending, payments, and staking activities. Although DAI has a smaller market share compared to centralized stablecoins like USDT and USDC, it still holds a significant position in the global stablecoin market.

Collateral list for DAI / USDS

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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 is backed by the Luna token through the smart contracts on the Terra blockchain. Users burn an equivalent amount of Luna to mint UST and redeem an equivalent amount of Luna to burn UST. The price stability is maintained through market arbitrage. During periods of Luna price increase, the UST mechanism promotes a positive cycle, known as the ‘positive spiral’. However, when the Luna price falls, UST can easily enter a ‘death spiral’ as the Luna market cap struggles to support the UST market cap, resulting in the price deviation of UST. UST once offered high yields through the Anchor Protocol, attracting user deposits and expanding its scale to become one of the major stablecoins in the market. Unfortunately, during the Terra ecosystem crash in May 2022, the price stability mechanism of UST faced significant challenges, ultimately leading to its detachment from the US dollar and price collapse. This event highlights the risks and challenges in market confidence and algorithm design for pure algorithmic stablecoins, especially under extreme market conditions.

It can be seen that in the stablecoin market, fiat-backed stablecoins have already occupied the majority of the market and the market size continues to grow. However, due to the continuously emerging trading demand in the market, decentralized stablecoins have been exploring new paths. Among them, Ethena has emerged as a leader, and the USDe issued by Ethena, as a synthetic dollar, has established a place in the DeFi field with its innovative financial solutions. The feature of USDe lies in the use of advanced Delta hedging strategies to maintain its peg to the dollar, which sets it apart from traditional stablecoins. In addition, the issuance of USD 0 by Usual is also noteworthy. This stablecoin integrates the robustness of traditional financial instruments with the transparency, efficiency, and composability of DeFi by introducing RWA as the underlying support. USD 0, with its permissionless and compliant framework, directly returns the real income from RWA to the community users, demonstrating the competitiveness of new stablecoins in the market. The emergence of these new stablecoins not only enriches the diversity of the market, but also brings more choices and investment opportunities to users.

Core Indicators of Native Stablecoins

We define stablecoins mentioned above, such as USDe and USD 0, which do not rely on fiat currency support, as ‘crypto-native stablecoins’. This type of stablecoin includes stablecoins collateralized by mainstream cryptocurrencies such as Bitcoin and Ethereum, stablecoins anchored by algorithmic pricing, and stablecoins anchored by neutral strategy to maintain value.

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

Stability is a key indicator of 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 the anchored assets. If stablecoins cannot maintain this anchoring relationship, the ‘stability’ feature will be questioned, thus losing its basic function as stablecoins.

To become a mainstream currency in the financial ecosystem, a stablecoin must reach a certain market size while ensuring the stable anchoring of its price. If a stablecoin fails to achieve scale expansion, its impact and utility will be limited, making it difficult to have significant influence in a highly competitive market.

The market size of stablecoins depends on the widespreadness of their application scenarios. Stablecoins without actual application scenarios, no matter how large their market value is, are difficult to stabilize their market position, like a tree without roots. Therefore, stablecoins must use all means to obtain a broader user base and diversified application scenarios as much as possible to ensure the stability of their value and enhance their liquidity.

Why We Invest in Ethena

Ethena’s vision is to reshape the cryptocurrency system and build bridges between DeFi, CeFi, and TradFi 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 the money market, derivatives market leverage collateral, stablecoin infrastructure, interest swap protocols, and spot AMM DEX. In the exchange field, Ethena’s liquidity pool not only supports existing centralized and decentralized trading platforms but also helps emerging exchanges solve the liquidity problem in the early stages, becoming a leading provider of deep and off-exchange liquidity in the market. For TradFi, Ethena’s USDe is highly favored for its unique yield, which combines the actual yield of two billion-dollar-scale cryptocurrencies, and its yield is weakly negatively correlated with traditional financial interest rates, with the underlying assets custodied by TradFi-recognized custodians. USDe provides large investors with a convenient way to obtain excess returns from the cryptocurrency market through a single asset. With the decline in real interest rates and the growth in speculative behavior and leverage demand for cryptocurrencies, it is expected that Ethena’s USDe yield will further increase, making it an important driving force for attracting trillion-dollar-scale TradFi entities to invest in the Ethena ecosystem.

Delta synthetic neutral USDe

USDe, launched by Ethena, is a native asset stablecoin that differs from traditional USD stablecoins that rely on underlying support such as US government bonds. Its issuance mechanism involves holding mainstream cryptocurrency spot positions 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 bullish periods, as the prices of mainstream assets rise and the scale of derivative contracts expands, the scale of USDe also grows. In addition, the short funding rate of USDe provides holders with a more attractive yield compared to traditional stablecoins like USDT. This advantage attracts more users to choose USDe, further driving the expansion of the USDe scale.

Casting, Redemption, and Pledging

The minting process of USDe allows users to exchange underlying assets for USDe by sending them to the protocol, and redemption is when users destroy USDe to redeem the original supporting assets. Staking USDe allows users to lock USDe in smart contracts to earn profits. When users stake USDe, they receive sUSDe, the value of which increases with the protocol’s earnings. Users can unstake sUSDe at any time to obtain USDe accumulated in value.

Delta Neutral Anchoring Mechanism

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

Hedging Strategies and Risk Management

Ethena’s hedging mechanism is a system composed 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, real-time verification of information and operation integrity, monitoring the availability of dependencies, coordinating collateral flow, and publishing real-time development updates. The system is centered around protecting the protocol collateral, ensuring 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 risks, external platform risks, liquidity risks, custody operation risks, counterparty risks of exchanges, and market risks. To address these challenges, Ethena actively takes measures to mitigate and diversify these risks and enhance the robustness and reliability of the entire system.

Transparency and Fund Security

The core value of stablecoins lies in their anchoring ability, which is to maintain the stability of the value tied to the fiat currency. In history, some stablecoins such as USDT and USDC have experienced de-anchoring due to lack of transparency and imperfect risk control mechanisms. To address this, Ethena ensures the stability and transparency of its asset management by adopting a mechanism of multi-signature and asset custody, as well as establishing deep cooperation with exchanges. In addition, Ethena has established sufficient reserve funds to cope with fluctuations in fees during extreme market conditions. These strategies not only enhance the credibility of USDe, but also provide solid security guarantees for the returns of USDe, ensuring the interests of holders and the stability of the market.

TradFi friendly digital dollar USDtb

USDtb is an institutional-grade stablecoin backed by BUIDL from BlackRock, the world’s largest asset management company. Its endorsed assets include high-quality short-term government bonds, ensuring outstanding 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 a direct gateway to DeFi. In addition, USDtb features a unique on-chain direct minting and redemption mechanism, providing round-the-clock service, further enhancing its competitiveness and convenience in the digital asset market.

As a product independent of USDe, USDtb provides users with a new choice of risk characteristics. Its existence enables USDe to more effectively respond to market challenges, especially during negative interest rate periods, Ethena can close USDe’s hedging positions and reallocate assets to USDtb to mitigate related risks, enhance the stability and risk resistance of the entire system.

ENA Token Design

The ENA token plays a crucial role in the Ethena ecosystem, serving as a governance token that gives holders the right to participate in key decisions, such as electing members of the risk committee and shaping policy direction, while also providing the opportunity to stake sENA for additional yields. As ENA is set to be used as a voting tool for Ethereal derivative exchanges in the future, its importance in the development blueprint of Ethena becomes increasingly prominent. These functions not only solidify ENA’s position as the core of the Ethena protocol, but are also crucial for maintaining decentralized governance and incentivizing user participation in the protocol.

In terms of liquidity, ENA has performed well on major exchanges, with consistently high trading volumes, which is a testament not only to the market activity of the Ethena protocol, but also to its widespread acceptance and acceptance by the market.

Operation Resources

Through deep cooperation with major well-known exchanges, Ethena has implemented a series of hedging strategies to cope with sudden situations in the futures market such as contracts, ensuring the stability and security of USDe. In addition, the use of USDe as a trading base currency is gradually being implemented, thanks to Ethena’s efforts to increase liquidity and mitigate risks. In terms of resources, Ethena collaborates with multiple top global market makers, who provide liquidity and market depth, further enhancing the market adaptability and resilience of USDe.

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The Future Prospects of Ethena

In the stablecoin field, the competitive landscape is far from certain. Although USDT and USDC occupy a leading position, emerging competitors have the ability to challenge their market position. The key is to choose stablecoin protocols with unique mechanisms, the ability to stabilize and anchor value, increase market value, and expand application scenarios. Just as DEX has already accounted for 10% of CEX trading volume, decentralized financial products are rapidly occupying market resources due to their verifiability and convenience. We expect that by 2025, decentralized stablecoins represented by Ethena will continue to grow their market size, reaching a 10% market share, or $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 revitalization of the U.S. economy and the reshaping of global finance, and become an important support for the domestic and global digital financial ecosystem in the United States. As an industry pioneer, ArkStream Capital will witness this great transformation of the decentralized financial era together with Ethena.