Summary

This proposal seeks to improve the capital efficiency of the backing assets of USDe by utilizing a portion of the idle USDtb, USDC and/or USDT in the backing as lending collateral on Aave.

As one of the blue chip lending protocols, lending on Aave could present minimal additional risk, while enabling the assets to earn more than they otherwise would. The increased rewards generated by the backing could improve USDe’s capital efficiency and help support a more sustainable APY for sUSDe holders over the long term.

As a second order effect, supplying USDtb, USDT or USDC could lower the borrow cost of dollars on Aave, helping users engage in sUSDe looping strategies in a more capital efficient manner.

Risk Committee Recommendations:

The Ethena Risk Committee’s approved the proposal and arrived at the following recommendations:

USDtb: To mitigate the risk that looped USDtb positions could indirectly cause significant sUSDe supply volatility the market’s total supply cap should start with a conservative market supply cap of $50M, which corresponds to the current supply cap of USDtb on Aave. If caps get lifted on Aave, we will revert with an updated recommendation.

USDC/T: Limit the USDT and USDC supply on Aave to ~ $600M (10% of their total USDT and USDC supply combined which would currently translate to $627M or below the minimum available liquidity over a 7-day horizon simulation). This restricts exposure to redemption, token-specific insolvency, and governance risks while also managing the inverse relationship between yield and available exit liquidity. Ethena is not expected to hit this cap anytime soon.

Adopt an Active Management Strategy: Rather than maintaining passive positions, dynamically manage the supplied capital based on forecast minimum available liquidity and utilisation which drive the highest yield available. Monitor the exit liquidity indicators (actual and simulated) and withdraw capital when the market hits an exit liquidity of 1.25 times the supplied capital, thereby protecting against adverse liquidity shifts.

Aave Backing Collateral Cap: Ethena should limit its initial allocation of stablecoin backing to Aave to at most 10% of the total stablecoin backing (which would currently be ~$260M). This cap ensures diversification of USDe’s backing and reduces dependency on Aave.

Next Steps

ENA and sENA holders are invited to vote on the proposa. By voting For, users are voting for Ethena to supply USDtb, USDC and USDT on Aave, within the parameters defined by the Risk Committee.

If approved, the allocations will be periodically reviewed based on liquidity conditions, risk factors, and capital efficiency.

The full proposals and Risk Committee analysis can be viewed below:

USDtb: https://gov.ethenafoundation.com/t/proposal-ethena-supplying-usdtb-to-aave-market/572

USDC/USDT https://gov.ethenafoundation.com/t/proposal-onboarding-aaves-ausdc-and-ausdt-as-usde-backing-assets/532