[ARFC] Remove USDe Debt Ceiling and Introduce USDe Stablecoins E-mode

[ChaosLabs]

Overview

Given the significant demand for USDe and its safe usage profile on Aave V3’s Ethereum Core deployment, Chaos Labs recommends removing the asset’s debt ceiling and introducing a new E-Mode configuration tailored to its current primary use case. This proposal will follow the Direct-to-AIP process.

Motivation

The proposal to lift the debt ceiling on USDe stems from its growing user demand and consistently strong risk profile. USDe’s appeal has been further amplified by the recent decline in the underlying yield of sUSDe, making the unstaked version (USDe) more attractive due to its deliberately enhanced points-earning potential in an effort to shift the incentive structure in accordance with aggregate revenue generation, earning 25x points as opposed to sUSDe’s 5x.

Over the past 30 days, the total supply of USDe has surged to 410M, led by two primary whitelisted USDe redemption addresses leveraging the reserve, periodically performing redemptions. However, its growth on Aave has been relatively capped at $86.4M due to the limitations imposed by the debt ceiling and its steward-governed constraints.

Conversely, due to dwindling yields, the sUSDe market has seen considerable outflows from Aave over the last 90 days, decreasing from nearly 1B to 175M today, with $135M in collateralized stablecoin debt.

Furthermore, USDe offers a lower risk profile compared to its staked counterpart, sUSDe, primarily due to the absence of the 7-day unstaking period as well as the use of an aggregate oracle that incorporates an exchange rate introduced through staking. This unstaking delay introduces liquidity constraints and potential exposure to short-term price volatility for sUSDe holders.

The initial implementation of a debt ceiling was intended as a protective measure to limit systemic exposure during the initial adoption period. However, historical data and recent analyses, including extensive stress tests and active redemption patterns, have shown robust stabilization mechanisms inherent to USDe, which effectively mitigate potential risks associated with price deviations. By eliminating the debt ceiling, Aave can better accommodate growing market demand and with the introduction of a custom E-Mode, provide users with greater flexibility to leverage USDe efficiently.

The recommended parameters for the USDe/Stablecoin E-Mode are slightly more aggressive than those for sUSDe/Stablecoin E-Mode, reflecting the lower risk profile.

Specifications

USDe on Aave V3 Ethereum Core

Parameter	Current Value	Recommended Value
Isolation-mode	Yes	No
Debt Ceiling	86,400,000	-

USDe/Stablecoin E-Mode

Asset	USDe	USDC	USDT	USDS
Collateral	Yes	No	No	No
Borrowable	No	Yes	Yes	Yes
LTV	90%
LT	93%
Liquidation Bonus	2%

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this proposal.

Copyright

Copyright and related rights waived via CC0

[LlamaRisk]

Summary

LlamaRisk supports the removal of USDe’s ceiling (currently $86.4M). This change has been motivated by higher user demand for USDe as user preference shifts from sUSDe (declining yield) to USDe (higher points multiplier). After the Bybit incident, it was observed that USDe maintained a safe usage profile and active redemptions. The main risk associated with USDe has always been its reliance on CEXs for most operations, and to tackle this, we have launched our Ethena Proof of Reserves. These include independent proofs of Ethena’s USDe backing assets. The debt ceiling was initially precautionary, but the data points like consistent peg performance, observed market liquidity depth, and efficient redemption processing suggest it is no longer needed. The E-mode parameters reflect USDe’s perceived lower risk.

Market Risk

Removing the $86.4M debt ceiling allows the total value of stablecoins (USDC, USDT, USDS) borrowed against USDe collateral to grow without a protocol-defined limit. This directly facilitates Aave in capturing a larger share of the USDe market and associated fees.

Source: USDe Historical Supply, LlamaRisk, April 25, 2025

Over the past few months, the circulating supply of USDe has been on a steady decline after peaking above $6B in February. The total on-chain supply is approximately $4.75 billion, with an over-collateralization ratio of 101.28%. Ethena’s reserve fund, comprising a mix of stablecoins and real-world assets (RWA) tokens, is currently valued at $60.94M.

Liquidity

Source: USDe/USDC Swap Liquidity, DeFiLlama, April 25, 2025

Users can swap USDe worth up to $55M for USDC within a slippage of 2%. The onchain liquidity is mainly contributed by the $68.5M Curve USDe/FRAX liquidity pool, followed by Curve USDe/USDC ($8.77M TVL) and Uniswap USDe/USDT ($6.2M TVL) pools.

Source: Odos Liquidity Router, April 25, 2025

sUSDe pools also indirectly contribute to this liquidity as aggregators can convert USDe to sUSDe instantly for better swap rates.

Source: USDe CEX Liquidity, CoinMarketCap, April 25, 2025

Ethena has significantly improved the CEX adoption of USDe, which has created an additional secondary market liquidity buffer for Ethena, helping to swap USDe to other stablecoins more efficiently. Approximately 17M USDe can currently be sold in CEXs under the -2% slippage threshold.

Source: USDe withdrawals from sUSDe, LlamaRisk, April 25, 2025

In the coming week, approximately $27M worth of USDe will be unlocked following the 7-day withdrawal period from the sUSDe contract, which currently holds 44.1% of USDe’s total on-chain supply. These unlocks may increase the selling pressure in the secondary markets on Ethereum Mainnet. The unlocked amount represents about 1.3% of the total USDe staked in the sUSDe contract. As part of the ongoing points campaign, users are being incentivized with a 20% bonus on USDe locked via wallets from Binance, Bybit, OKX, Bitget, Pintu, or Gate. However, the long-term effectiveness of this incentive remains to be seen.

E-mode

The proposal to remove the USDe debt ceiling while retaining Isolation Mode (permitting only USDC, USDT, and USDS as debt assets) and introducing a dedicated E-Mode configuration (90% LTV, 93% LT, 2% LB) for these assets presents a mixed risk profile. While Isolation Mode contains direct contagion risk to other assets within Aave V3 Ethereum, removing the debt ceiling allows for potentially unlimited scaling of exposure within the USDe E-mode silo. Notably, a prior incident involving the sUSDe-USDS E-mode pairing saw excessive use of USDS from the D3M pool in looping strategies, which led to significant volatility in supply and borrow rates for borrowers using ETH-correlated assets as collateral. While we support the inclusion of USDS as a borrowable asset within the USDe E-Mode, we advise careful monitoring to mitigate the risk of similar dynamics re-emerging.

Source: USDe/USD Exchange Rate, Coingecko, April 25, 2025

Under the proposed E-Mode parameters, the maximum achievable leverage for USDe on the Ethereum Core market would be 10x. A narrow 3% buffer between the LTV and the LT is the critical safeguard against depeg risk. Over the past few months, USDe has seen a single price deviation of 30 basis points, which could have triggered liquidations for users employing maximum leverage. However, this risk remains minimal, as most USDe suppliers maintain strong health scores, as shown below.

Source: Open USDe Positions on Aave V3 Ethereum Core, ChaosLabs, April 25, 2025

Disclaimer

This review was independently prepared by LlamaRisk, a community-led decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

[ChaosLabs]

As we await the potential execution of the change above, we will increase the debt ceiling via the Risk Steward process by 20% to 103.68M in accordance with the observed demand.

Specification

Instance	Asset	Current Debt Ceiling	Recommended Debt Ceiling
Core	USDe	86,400,000	103,680,000

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0