“27% Annual Yields.” Sound Good Too Good To Be True? It Is.

TL;DR

• A new DeFi platform, Ethena, is promoting a 27% annual yield for users that stake its stablecoin (which sounds way too good to be true, and probably is).

Full Story

In middle school, Kevin (our intern) spent an entire summer forming a ‘deep friendship’ and ‘unwavering bond’ with his hero, Criss Angel, on Facebook.

(This is something he still holds claim to this day — and none of us have the heart to tell him that he was almost certainly being catfished).

There’s a parallel with that story, and Ethena — which is a new DeFi platform, promoting a 27% annual yield for users that stake its stablecoin. 

Which sounds way too good to be true. 

And it probably is. Let’s Dive in: 

We need to preface this with a reminder that stablecoin projects like this one, which offer ridiculously high yields, have a tendency to fail miserably.

(*Cough cough* Terra). 

High yields can often be maintained in a bull market, when no one’s asking questions…

But when conditions weaken and folks start pulling their money out — it’s hard to liquidate multiple large holdings without ‘destabilizing the stablecoin,’ and crashing its price.

So how’s Ethena trying to differentiate itself?

It’s stablecoin yield pulls from two sources:

Staking Ethereum (which earns ~5% per year), and by shorting Ethereum futures (earning ~20% per year).

Here’s what that last bit means:

Shorting = betting the price of a crypto/share will go down.
Futures = betting on the future price of a crypto/share, by agreeing to buy it at a set price, on a set date in the future.

So when someone ‘shorts futures’ — they’re betting that these futures buyers ‘bet on the future,‘ is wrong…confused? Same.

Here’s an example for you:

• Someone buys a futures contract, guessing that Ethereum is going to be worth less than it is today, in two months time →

• You think they’re wrong, so you borrow their futures contract from them and sell it →

• You wait for two months, and (hopefully) are able to buy the contract back for less than you sold it, and collect the difference.

All that’s to say: when you stake Ethena, you’re essentially lending your money to the project and saying “Go stake/invest my money and send me a kick back.”

To which they’re responding — “Sure, we can offer 27% annual returns.”

Which sounds:

1. Lovely!

2. Way, way, WAY too good to be true.

(It’s giving ‘Kevin’s relationship with Criss Angel’ vibes).