sUSDe (Staked USDe) is a yield-generating synthetic dollar introduced by Ethena Labs. It is built on Ethereum and designed to maintain a stable value through delta-hedging strategies, ensuring its peg to the USD. sUSDe accrues value over time as protocol-generated revenue accumulates within its staking contract. Users can stake their USDe to receive sUSDe on Ethena. We propose to list sUSDe on Venus Protocol Ethereum Core Pool.
Motivation
Stable Value: sUSDe is designed to provide stability through delta-hedging, making it a reliable asset in volatile markets.
Yield Generation: Staking USDe to receive sUSDe allows users to earn a yield, increasing the appeal of this asset.
Liquidity: sUSDe has shown significant adoption with over $50 million in liquidity on platforms like AAVE and Curve. Integrating sUSDe can enhance Venus Protocol’s liquidity and user engagement.
Decentralization and Innovation: sUSDe promotes decentralization and innovative financial mechanisms, bypassing traditional banking systems.
Market Acceptance: With extensive use and a robust economic model, sUSDe is positioned to drive significant volume and utility within Venus Protocol.
DeFi Integrations: sUSDe is integrated across various DeFi platforms such as AAVE, Balancer, Curve, FRAX, OpenOcean and Uniswap contributing to its liquidity and market acceptance.
Risks
Smart Contract Risks: As with any new token, there are inherent smart contract risks. However, sUSDe has undergone multiple audits and follows stringent security measures.
Liquidity Constraints: Initial integration might face liquidity constraints, but the extensive liquidity of USDe on other platforms mitigates this risk.
Market Risks: Volatility in the underlying collateral could affect sUSDe’s stability, although delta-hedging strategies are designed to minimize this risk.
Benefits
Attract more users to Venus and enhance its overall liquidity. The integration of sUSDe could also enhance the protocol’s operational efficiency and stability.
By diversifying the range of stablecoin assets available, Venus could reduce its reliance on any single stablecoin, thereby mitigating risks associated with market fluctuations and potential Depeg in any one specific token.
Furthermore, the addition of sUSDe would increase interoperability between different DeFi platforms, fostering a more connected and seamless ecosystem.
Background
Ethena Labs has developed sUSDe as a part of its innovative suite of DeFi products. sUSDe is fully collateralized and its stability is maintained through automated delta-hedging strategies. It has been proposed for integration into AAVE V3 on Ethereum, highlighting its potential to enhance DeFi liquidity and stability. The proposal emphasizes the strategic benefits of incorporating sUSDe, including enhanced yield generation and market adoption.
Oracle & Price Feeds: Implementation expected with Pyth & Redstone.
Yield Mechanism: Based on delta-hedging strategies, ensuring stable value and yield generation.
Community Involvement
We recommend that the Venus community support this proposal and, if agreed, request Chaos Labs to analyze and provide risk parameters for the safe integration of sUSDe into Venus Protocol.
This proposal aims to enhance the Venus Protocol by integrating a stable, yield-generating asset that supports the broader goals of liquidity, stability, and innovation in DeFi. We look forward to the community’s feedback and the successful adoption of sUSDe.
I fully support this proposal to list sUSDe on Venus Protocol. Its integration will significantly enhance liquidity and user engagement on Ethereum. Let’s move forward with Chaos Labs’ analysis to ensure a safe and successful implementation!
I support this listing as it will help the growth of the venus protocol. I also strongly recommend that we list other viable and valuable projects on the platform as that is one way to drive protocol growth and expansion.
Chaos Labs is providing risk parameter recommendations for adding sUSDe to the Venus Core Pool on Ethereum, should the Venus community decide on its addition. Following is our analysis and risk parameter recommendations for the initial listing.
Liquidity and Market Cap
sUSDe is the staked version of Ethena’s synthetic dollar, USDe, which currently has a market cap of $3.4B; 1.5B USDe is staked as sUSDe.
Collateral Factor
Considering the volatility and the correlation of sUSDe to USD, we recommend setting the CF to 72% and the Liquidation Threshold to 75%. This is similar to other similar assets, albeit with a more conservative adjustment to account for the smaller liquidity and the asset’s relative novelty. Consequently, there might be slightly more variance expected in the future.
Supply Cap and Borrow Cap
Chaos Labs’ methodology for initial supply caps generally suggests establishing the Supply Cap at twice the liquidity available based on the Liquidation Bonus price impact. However, due to the non-atomic nature of withdrawals, evident in the 7-day sUSDe withdrawal period, we initially utilize a 1x value (using USDe) to determine the Supply Cap. In the event of increased demand, we will review and adjust our initial recommendations.
Given the current DEX liquidity profile of USDe, we recommend a supply cap of 45M sUSDe; we do not recommend allowing the asset to be borrowed given its novel risks and limited use cases for borrowing.
General Risks Associated with Ethena
The following section offers a concise overview of the external risks associated with sUSDe:
Significant LST Depeg
Permanent LST Depeg: A permanent LST depeg could occur due to extreme validator slashing, hacks, or other unforeseen events, leading to USDe becoming under-collateralized.
Liquidation of Ethena Hedges: In the event of a significant depeg (which is highly improbable given the current split between LSTs, ETH, and USDT), Ethena’s perpetual short positions on CEXes could be liquidated.
Mass Redemptions for USDe: If Ethena faces mass redemptions for USDe, it could result in crystallizing losses if the protocol is required to sell an LST when it is under the peg. The primary market activity should ideally use USDT, with ETH as backup, and LST only utilized when a large proportion of USDe is redeemed within a short timeframe. Additionally, as mentioned earlier, the 7-day withdrawal period can lead to apparent short-term discounts in the sUSDe fair price, as selling effectively bypasses the queue.
Persistent Negative Funding Rates
Insufficient Market Size: The perpetual market might be too small to absorb Ethena’s open interest, especially during periods of persistent negative funding rates.
Drain on the Insurance Fund: A prolonged period of negative funding rates could drain Ethena’s insurance fund.
Natural Movement to Negative Funding Rates: Ethena’s short open interest could naturally cause funding rates to move into negative territory.
Slippage and Operational Challenges
Risk of Slippage: Multiple transactions are required to maintain balanced USDe backing and optimal backing ratios. Slippage or human errors during these transactions could lead to losses.
Impact of Slippage on Depegging: Slippage during the closure of futures hedges may be passed on to primary market actors, posing a risk of de-pegging USDe to the extent of the slippage.
For a more in-depth quantitative analysis of the risks associated with sUSDe, please refer to our comprehensive analyses on Ethena, which are available here.
