Summary
LlamaRisk supports establishing a liquid E-Mode for sUSDe on both Mainnet and Lido instances. The prerequisite onboarding of sUSDe to the Lido instance represents a measured and rational decision. As referenced in the GHO Lido onboarding proposal, sUSDe would serve dual purposes:
- Provide a new collateral type for GHO
- Enable enhanced stablecoin borrowing utility on the instance
The proposed sUSDe/stablecoins liquid E-Mode would further optimize these use cases.
While we support the sUSDe onboarding parameters proposed by @ChaosLabs and @ACI for the Lido instance, historical data reveals that sUSDe’s secondary market price experienced a maximum temporary discount of 3.8%. Since this exceeds the proposed 3% liquidation bonus, we recommend increasing the liquid E-Mode liquidation bonus to 4%.
Detailed analysis
Current Status
During the past months, until the recent reversal of USDe, TVL gradually decreased and reached a low of $2.45B. As the market conditions started improving and the USDe yield increased again, the USDe supply retracted and currently stands at $2.9B.
sUSDe Supply
The yield attractiveness has also resulted in a higher ratio of USDe supply staked into sUSDe, which currently stands at a record of 65%. Consequently, the absolute supply of sUSDe has also increased to 1.7B sUSDe.
Source: LlamaRisk Ethena’s Risk Dashboard, 9th November, 2024
Protocol Health
The overall protocol stability and over-collateralization continue to improve as adequate levels of Reserve Fund are maintained and the notional value of collateral increases.
Source: LlamaRisk Ethena’s Risk Dashboard, 9th November, 2024
sUSDe Liquidity
The largest sUSDe liquidity pools combine $48.3M of liquidity with a total amount of 15.9M sUSDe on Curve, Balancer V2, and Uniswap V3. The largest pool pairs sUSDe with sDAI, while smaller pools combine sUSDe with stablecoins: USDC, USDT, and crvUSD.
Source:DefiLlama, 9th November, 2024
Part of the sUSDe liquidity provision is rewarded with Ethena Rewards Campaign points as part of the season 3 airdrop farming. Nonetheless, it can be deemed that such incentives have become ineffective as the liquidity-to-supply ratio for sUSDe remains at ~2.3%.
Historical Stability
On Aave’s Mainnet market, sUSDe’s price oracle combines the internal sUSDe/USDe exchange rate with Chainlink’s USDe/USD price feed. In addition, the CAPO mechanism is used to calculate the internal exchange rate. This means that the USDe price in secondary markets mainly influences the Oracle price. In the event of liquidation, liquidators would acquire sUSDe at a discount equal to the liquidation penalty, currently set at 8.5% on Aave Mainnet. The liquidation penalty should exceed the highest observed discount for sUSDe to ensure profitable liquidations.
sUSDe De-peg Risk
Historically, low sUSDe liquidity has made it susceptible to secondary market de-pegs. An instance of a 3.8% discount was observed in April 2024. One more temporary de-peg happened on 5th August 2024, when the discount reached 1.8%. The liquidation penalty should, therefore, be 4% to ensure the profitability of liquidations. This could be moderated as the sUSDe liquidity situation improves.
Source: Dune Analytics, 9th November, 2024
Liquidation Risk
As discussed above, the sUSDe price on Aave is largely dependent on the USDe secondary market price provided by a dedicated Chainlink’s USDe/USD feed. It can be observed that since its onboarding on Aave, the USDe discount never exceeded 20 bps (-0.2%). Furthermore, extended pricing data shows that the maximal historical market price discount was 36 bps (-0.36%).
Source: Chainlink USDe/USD data feed, 9th November, 2024
sUSDe is onboarded as an isolated asset, allowing only stablecoins to be borrowed using sUSDe as collateral. Given the historical stability of the USDe peg, no liquidations of sUSDe-backed loans have occurred. Liquidation risk is minimized for 20% of sUSDe-backed loans on the Mainnet market, where USDe is borrowed against sUSDe itself. As a result, the lower LTV-to-LT buffer imposed by the Liquid E-Mode is adequate to cover any temporary fluctuations in the secondary market.
Estimated Increase in Leverage
The onboarding of sUSDe expects to enable leveraged yield looping with stablecoins on the Lido market. On the Mainnet market, the leveraged yield looping is already possible but subject to a lower total leverage due to a lower LTV threshold.
The maximum possible leverage for sUSDe on Mainnet, assuming an infinite number of loops, is currently:
Where current max. Given the proposed liquid E-Mode’s max, the LTV of sUSDe is 72%. With an LTV of 90%, the highest possible leverage would be 10x. Nonetheless, as data on Mainnet indicates, only some users aim to borrow at maximal leverage. It is expected that sUSDe will be borrowed at a lower liquidation risk, especially since e-Mode would not offer USDe as a borrowable asset.
Source: LlamaRisk
Disclaimer
In the interest of transparency, LlamaRisk is a compensated member of Ethena’s Risk Committee and provides ongoing risk advisory services to their protocol.
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded partly by the Aave DAO. LlamaRisk did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information should not be construed as legal, financial, tax, or professional advice.