ENA

1. What is Ethena protocol and ENA token?

Launched in 2023, Ethena is a protocol built on the Ethereum blockchain that provides a crypto-native solution for money that is not reliant on the traditional banking system infrastructure. The project comprises two key elements. First, Ethena operates as a protocol for the synthetic dollar USDe. Second, Ethena aims to establish a USD savings mechanism for users worldwide, structured on a derivative basis, known as the Internet Bond.

A synthetic dollar is a synthetic version of the US dollar on the blockchain. It is not backed by the actual US dollar in a traditional sense, but rather is created through smart contracts and algorithms to mirror the value of the dollar, whereby 1 USDe is equivalent to 1 USD. The protocol mints USDe by using Ethereum or Bitcoin as collateral. This price stability is achieved through a risk management mechanism in derivative finance known as delta hedging. This is an options strategy used to minimize risk by establishing offsetting positions in the derivatives market or utilizing other financial instruments.

For example, in order to acquire USDe, users stake Ethereum, which is the “collateral”. Ethena simultaneously initiates a short position on Ethereum with an equivalent value to the collateral. A short position is when a trader sells an asset with the intention of repurchasing it later at a lower price. This entails betting on the decrease of the price of Ethereum. If Ethereum’s price surges, the value of the collateral asset (Ethereum) securing USDe rises. However, the loss from the short position offsets this increase. Conversely, if Ethereum’s price drops, the loss from the decrease in Ethereum’s price is counterbalanced by the profit from the short position.

The Internet Bond, noted as sUSDe, operates as a digital bond running on the Ethereum blockchain platform. It offers a dollar-denominated savings instrument with the features of DeFi, that leverages revenue derived from the staked collateral (e.g., staked ETH), the spread earned from the hedging derivatives position of the collateralized assets. Users in permitted jurisdictions are able to stake their USDe to receive sUSDe to earn rewards generated by the protocol. USDe can therefore play an important role as a reserve asset supporting other DeFi applications that require backing (for example, stablecoin issuers) or as a collateral asset on money markets.

ENA is first and foremost a governance token, governing the Ethena protocol and its critical decisions. It gives holders a voice in the direction of the Ethena protocol. It also can be staked to earn rewards. ENA market cap currently stands at $2.3 billion, ranking no. 60.

2. Ethena Consensus Mechanism

Ethena doesn’t have its own consensus mechanism. As Ethena protocol is built on Ethereum blockchain, it relies on Ethereum consensus mechanism.

Staking

ENA token can be staked. This enables staked ENA holders to delegate everyday decision-making with respect to key aspects of the ecosystem to sophisticated, expert-level stakeholders. Stakers receive “sENA”, which is the liquid receipt token for locking ENA.

Rewards

sENA itself will earn rewards, initially receiving unclaimed ENA from the season 2 airdrop distribution. Besides, it is composable throughout a wide range of DeFi apps. Therefore, it can be used on other liquid staking and yield farming platforms to earn rewards.

In addition, sENA now earns rewards for Ethereal, a small web3 infrastructure protocol built on Layer-1 blockchain[1]. The Ethereal team committed to giving sENA holders 15% of any potential future token supply.

3. Use Cases of Ethena protocol

The use case of Ethena protocol is creating the USDe token, and the Internet Bond through staking of USDe.

4. Use Cases of ENA token

The ENA token has 2 primary roles within the protocol:

1. ENA holders can vote bi-annually to elect members to a Risk Committee, and in the future additional committees performing critical roles within the ecosystem. sENA governance token holders are able to delegate everyday decision-making with respect to key aspects of the ecosystem. sENA holders will be able to vote directly on ENA tokenomics proposals and any proposals concerning ENA specifically.
2. Earning rewards. As outlined above.

5. Shariah Screening

In this section, we will highlight Shariah’s stance on the Ethena protocol and ecosystem and subsequently attempt to draw Shariah’s opinion about the exchange and use of ENA token. This screening is based on Ethena’s website.

AAVE’s Shariah compliance will depend on assessing the following elements:

• The project: purposes of Ethena protocol
• The legitimacy
• Underlying Relationships
• Use cases of AAVE
• Can AAVE token be traded?

• The project

Ethena is a DeFi protocol aiming at creating a cryptocurrency, USDe, that mirrors the value of the USD to provide a stable crypto-native currency. This goal does not contradict with Shariah. However, the mechanism through which the USDe is pegged to the dollar relies on hedging using financial derivatives. The primary value added of the project, which is the stability of the currency, is dependent on this mechanism. The project thus depends on and promotes the use of financial derivatives, which are prohibited in Shariah. AAOIFI Shariah Standard no. 20 states: “It is not permitted according to the Shariah to undertake futures contracts either through their formation or trading.” It also states: “Options indicated above are not permitted neither with respect to their formation nor trading”[2].

The standard’s Appendix explains that the basis for the prohibition of futures is that these are binding promises that are converted spontaneously into sale contracts pertaining to the future without an offer and acceptance. The basis for the prohibition of options is that the subject-matter of the contract in them is not wealth that can be deemed subject to compensation according to Shariah.

On the other hand, the second element of the project, which is the Internet Bond, relies on two things: first, staking USDe and getting sUSDe in a risk-free scheme to earn rewards. The majority of the rewards are driven from spreads earned from derivatives hedging positions. This makes the second element of the project also Shariah non-compliant.

As such, Ethena’s project is viewed as Shariah non-compliant

• The legitimacy

Ethena website provides detailed information about the protocol and the underlying processes and mechanisms. According to Certik Skynet, the platform security score as of date is 88.4, with a lag in the code security component which scored 70.6, ranking no. 144 and positioned among the top 5% crypto tokens with an AA rating. The protocol is hence considered at acceptable levels of legitimacy.

• Underlying relationships

Relationship between token holders and Ethena protocol

ENA token holders participate in governance, and they can stake their ENA tokens and receive sENA receipt tokens, to earn rewards. This relationship is viewed as Shariah non-compliant because it involves helping and directing a non-compliant activity, that is the use of derivatives. Hence, rewards on this staking are not allowed.

• ENA Use cases

The two use cases of the ENA token mentioned earlier, namely governance and staking, are Shariah non-compliant, since they facilitate and regulate hedging and maintaining stability through the use of derivatives, which is something prohibited by Shariah.

Conclusion of Shariah Opinion

This report has analyzed ENA token based on its protocol’s project, structure and the token’s use cases. The report deems that buying and selling ENA token is Shariah non-compliant. This is due to the fact that the functions of the token depend on and promote the use of financial derivatives. Staking of ENA token is also not allowed. The report does not cover the Shariah stance of exchanging USDe. This may be covered in a separate analysis.

[1] Ethena is aiming for creating a fully operational network. This network will allocate specific portions of its token supply for airdrops to ENA token stakers. Ethena’ strategy includes the development of Ethereal application for decentralized trading.
[2] AAOIFI Shariah Standards Book, 2015, Shariah Standard no. 20.