“27% annual returns.” Sounds good, too good to be true? It is.

TL; DR

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

Full story

In high school, Kevin (our intern) spent the summer forming a “deep friendship” and “unshakable bond” with his hero, Criss Angel, on Facebook.

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

There is a parallel with that story, and Ethena – a new DeFi platform promoting 27% annual returns for users who stake their stablecoin.

That sounds way too good to be true.

And it probably is. Let’s dive in:

We should preface this with a reminder that stablecoin projects like this, which offer ridiculously high returns, tend to fail. pitiful.

(*Cough cough* Terra).

High returns can often be maintained in a bull market, when no one is asking questions…

But when conditions deteriorate and people start withdrawing their money, it’s difficult to liquidate multiple large holdings without “destabilizing the stablecoin” and crashing its price.

How does Ethena try to distinguish herself?

The stablecoin revenue comes from two sources:

By betting Ethereum (which earns ~5% per year) and by shorting Ethereum futures (which earns ~20% per year).

This is what that last bit means:

Shorting = betting that the price of a crypto/share will fall.
Futures = betting on the future price of a crypto/stock by agreeing to buy it at a fixed price, on a fixed date in the future.

So if someone is shorting futures – he is betting that these futures buyers are “betting on the future” – he is wrong…confused? The same.

Here’s an example for you:

• Someone buys a futures contract thinking that Ethereum will be worth it fewer than it is now, in two months →

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

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

All that means is, when you stake Ethena, you’re essentially lending your money to the project and saying, “Go stake/invest my money and send me a kickback.”

To which they respond: “Sure, we can offer an annual return of 27%.”

Which sounds:

1. Sweet!

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

(It gives off a ‘Kevin’s relationship with Criss Angel’ vibe).