In this bear market, there are not many highlights in the DeFi track, and the stablecoin project Ethena is one of them.

When it comes to stablecoins, the ones we are most familiar with are USDT, USDC, and DAI. Although they have been used in the crypto ecosystem for a long time and have almost monopolized the market, people have always hoped to find a more ideal stablecoin.

On the one hand, this is because the mainstream stablecoins currently have obvious weaknesses: for example, USDT is widely questioned in terms of credit, USDC lacks the ability to resist censorship, and DAI lacks sufficient liquidity.

On the other hand, stablecoins are the foundation of all transactions in the crypto ecosystem and also serve as a bridge connecting the crypto ecosystem and the real world. The project that can become the king of stablecoins will control the entire crypto ecosystem. Obviously, the existing stablecoin projects are not considered as the king due to their obvious problems, so there are always teams persistently making new attempts.

Ethena is one such new stablecoin project.

Its introduction uses a series of financial terms to describe its operation, and its fundamental logic is to simulate a stablecoin anchored to the US dollar at a 1:1 ratio using algorithms.

Its characteristics can be summarized as follows:

• It does not use over-collateralization, thus releasing liquidity as much as possible, surpassing DAI in this aspect.
• The issuance of the currency is generated by users collateralizing encrypted assets, thus possessing the ability to resist censorship, surpassing USDC in this aspect.
• It uses a series of hedging trades to maintain the value of the currency pegged to the US dollar in order to gain credibility, surpassing USDT in this aspect.

In my opinion, the most important and fundamental of these three characteristics is the third one: maintaining the value stability through a series of hedging trades. It is the fundamental guarantee for the stable operation of the entire system.

However, precisely in the third point, in order to hedge against the risk of exchange rate fluctuations, it has to introduce centralized exchanges, thereby introducing centralized risks.

To eliminate this risk, decentralized derivative exchanges in the future would need to match centralized exchanges in terms of liquidity and performance.

In addition, the operation mechanism of this system seems overly complex. Any system that is overly complex will inevitably expose too many weaknesses and is susceptible to external interference.

In terms of design philosophy, its approach hopes for the pure algorithmic implementation of exchange rate stability, but the implementation and execution of algorithms are engineering problems. The actual execution and ideal algorithm construction are often not easily matched.

Essentially, Ethena's operation still follows the rules of the traditional financial system.

In that case, we can completely refer to a very good stablecoin reference: the Hong Kong dollar.

The Hong Kong dollar is pegged to the US dollar using a linked exchange rate, and its exchange rate fluctuation is controlled between 1 USD to 7.75-7.85 HKD. Its issuance adopts the simplest collateralization model: for every 1 USD collateralized, the corresponding HKD is issued according to the exchange rate.

When the Hong Kong dollar deviates from the linked exchange rate, the Hong Kong government will maintain the exchange rate through open market buying and selling.

In this process, the most crucial key to maintaining exchange rate stability is that the Hong Kong government must have sufficient liquidity reserves, especially in USD liquidity.

In the 1997 financial crisis, the Hong Kong dollar was targeted because international speculators believed that the Hong Kong government's liquidity was insufficient to maintain the exchange rate of the Hong Kong dollar. The key to Hong Kong's survival in that crisis was that the Hong Kong government obtained sufficient USD guarantees through various means.

Compared to the Hong Kong dollar model, Ethena is more complex and more dependent on liquidity guarantees. However, the exchanges that provide exchange rate guarantees for Ethena cannot match the Hong Kong government in terms of volume and credibility.

Therefore, I believe that maintaining the exchange rate of Ethena will be more complex and challenging.

I am only interested in taking advantage of this project for profit, and I do not have a strong interest in buying the currency at the moment. I only have the coins obtained through profit-taking, and I am not considering buying coins for the time being.

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