#ENA# If ENA (Ethena) becomes the "2nd Luna/Terra Luna", it means that this project will also undergo a horrific collapse, similar to what happened with Terra/Luna in May 2022.

Below are the scenarios and potential consequences if this comes to fruition:

The collapse of USDe and ENA:

USDe lost its peg (de-peg): Similar to UST losing its peg from USD, USDe (the synthetic stablecoin of Ethena) will lose its 1 dollar value and may drop close to 0.

ENA value collapse: The governance token ENA, designed to support and absorb the fluctuations of USDe, will lose significant value. The price could plummet by 99% or more, becoming almost worthless.

Domino effect: Investors holding USDe and ENA will suffer huge financial losses, losing all their assets.

Losing faith in Ethena and DeFi in general:

Trust in Ethena has been shattered: The credibility of the Ethena project will be completely destroyed. It will be difficult to restore trust from the community and investors.

Impact on the entire stablecoin and DeFi market: Another major collapse of a decentralized stablecoin ( after UST) will deal a heavy blow to investor confidence in the entire synthetic stablecoin sector and DeFi in general. It could lead to panic, mass withdrawals (bank run) from other DeFi protocols.

Tighter oversight: Regulatory authorities worldwide will enhance supervision and may impose stricter regulations on stablecoins and DeFi protocols, especially those with complex operating mechanisms or relying on algorithmic balancing.

The consequences in the broader Crypto market:

Market-wide decline: The collapse of a major project like Ethena, which has achieved a significant market capitalization, can trigger a wave of sell-offs across the entire cryptocurrency market, dragging down the prices of Bitcoin, Ethereum, and other altcoins.

Mass liquidation: If Ethena is used as collateral or deeply integrated into other DeFi protocols, its collapse could trigger liquidation (liquidation) cascades, causing further chaos.

Withdraw funds from the exchange: Users may lose trust in exchanges or investment funds related to Ethena, leading to a massive withdrawal of funds.

Why are people worried that Ethena could be the second Luna?

This comparison arises from some similarities and concerns:

Synthetic/algorithmic stablecoin: Both UST (Luna) and USDe (Ethena) are not fully collateralized by traditional fiat assets but rely on complex mechanisms to maintain price pegs. UST relies on a burn/mint mechanism with LUNA, while USDe relies on delta-hedging (risk mitigation) through short futures and long positions in the underlying asset.

High yield: Both Terra/Luna ( through Anchor Protocol ) and Ethena promise high returns that attract users. High returns always come with high risks.

Mechanism risk: Both have inherent risks in the mechanism of maintaining the price peg. With UST, it is the "Death Spiral" (death spiral) when confidence is lost. With USDe, the main risk lies in the ability to maintain large hedging positions under extreme market volatility, counterparty risk (exchange risk), and the risk from prolonged negative "funding rate" (when the hedging costs are too high).

However, it is also important to note that Ethena has tried to learn from Luna:

Ethena does not rely on a burn/mint mechanism with another token to maintain its peg like Luna.

Ethena uses collateralized assets in the form of cryptocurrency and derivative positions to hedge against delta risk, which is a distinct method compared to Luna.

However, risks still exist. Whether a project can collapse like Luna or not depends on many factors: the sustainability of the mechanism, the scale, the team's response during a crisis, and market sentiment. Investors need to conduct thorough research and be cautious before participating.