Why does ENA continue to fall? What measures has the Ethena team taken to stop the decline?

Author: Jack Inabinet, Bankless; Compiler: Baishui, Golden Finance

The token of synthetic dollar stablecoin issuer Ethena experienced an impressive surge after its launch, but once the initial rise gradually faded, ENA found itself in a permanent downtrend! Why does ENA continue to plummet? What measures is the team taking to promote the adoption of its stablecoin?

On April 11, ENA hit an all-time high in both USD and BTC, just two days before USDe reached its supply peak, and the broader risk market deteriorated, seemingly plunging on concerns about the intensification of conflict in the Middle East.

While funding rates on BTC and ETH perpetual swaps (the main source of Ethena’s revenue) cooled sharply in April, speculation about the upcoming second wave of ENA airdrop rewards fueled demand for Ethena assets and kept yields high.

This bastion of returns support has since collapsed, with Pendle’s USDe swap fixed yields compressing to 29% from levels above 100% in early April.

In recent weeks, evidence has begun to mount that

crypto markets may have shifted to a more negative funding rate regime, with funding rates continuing to decline throughout April and May.

Although Ethena's Delta neutral strategy returns increased significantly as BTC hit new all-time highs twice before, the funding rate rose sharply and led to a large influx of deposits, but the negative funding rate has begun to erode yields, reducing the attractiveness of holding USDe and USDe. Raising concerns about future capital outflows.

Because the net negative funding rate will cause depositors to suffer losses, Ethena established an insurance fund at its inception, which receives part of the proceeds generated and has accumulated $39.4 million in reserves to guard against losses on $2.32 billion in outstanding US dollar liabilities, a paltry 1.7% buffer.

Today, Ethena announced that it will reduce the portion of revenue reserved for the insurance fund from 50% to 20%, nearly doubling sUSDe’s annualized return to 37%, a change that is expected to last until at least June to coincide with Athena’s Bybit integration, which will allow users on CEX to leverage USDe as trading collateral.

Funding rate compression has clearly taken a toll on Ethena, forcing the protocol to take increasingly drastic measures to promote adoption of its dollar-pegged asset.

Unfortunately, this recent action is only a half-measure that temporarily distracts from the fundamental problem. Even at a 50% rate, Ethena's insurance fund is woefully inadequate to compensate depositors for losses from prolonged negative funding rates.

Institutional players have begun arbitrating the basis between spot BTC and futures contracts, as evidenced by hedge funds holding spot BTC ETFs, increasing the competitiveness of the types of transactions used by Ethena and squeezing margins.

If cryptocurrencies truly transition to a more negative funding rate environment, ENA will continue to struggle, and Ethena will likely be forced to tap the insurance fund, and the depletion of the insurance fund could trigger a crisis of confidence in the backing of USDe ...