Author: BeWater Giga-Brain🧠 @Loki_Zeng
This article provides an in-depth analysis of USDe, the most controversial stablecoin at present, and explores the properties of its stablecoin, the value of the collateral behind it, and its core risks.
Let's Dive Deep into the Water!
USDe definition: fully collateralized semi-centralized stable currency
Stablecoins can be classified in many ways, such as:
Full Mortgage and Non-Full Mortgage
Centralized hosting and decentralized hosting
On-chain issuance and centralized institution issuance
Permission required and permission not required
There will also be some overlap and changes. For example, in the past we believed that the supply and circulation of algorithmic stablecoins such as AMPL and UST were stablecoins that were completely regulated by algorithms. According to this definition, most stablecoins are non-fully collateralized stablecoins, but there are exceptions, such as Lumiterras LUAUSD. Although its minting and destruction prices are algorithmically regulated, the protocol vault provides no less than LUAUSDs anchor value as collateral. LUAUSD has the dual attributes of algorithmic stablecoin and fully mortgaged stablecoin.
Another example is DAI. When DAIs collateral is 100% of on-chain assets, DAI is a decentralized managed stablecoin. However, after the introduction of RWA, some of the collateral is actually controlled by real entities, and DAI becomes central. A hybrid managed and decentralized stablecoin.
Based on this, we can peel off overly complex classifications and abstract them into three core indicators: whether there is sufficient mortgage, whether it is issued without permission, and whether it is de-custodial. In comparison, USDe and other common stablecoins have some differences in these three attributes. If we believe that [decentralization] needs to meet both the conditions of [permissionless issuance] and [de-custodial], then USDe does not meet the requirements, so classifying it as a [fully collateralized semi-centralized stablecoin] is suitable.
Collateral value analysis
The first question is whether USDe is fully collateralized, and the answer is obviously yes. As stated in the project documentation, USDe is collateralized by a synthetic asset of the crypto asset and the corresponding short futures position as collateral.
l Synthetic asset value = spot value + short futures position value
l In the initial state, spot value = X, futures position value = 0, assuming the basis is Y
l Collateral value = X + 0
l Assume that after a certain period of time, the spot price increases by a US dollar, and the futures position value increases by b US dollars (a and b can be negative). The position value = X + a -b = X + (ab), and the basis becomes Y + ΔY, where ΔY = (ab)
It can be seen that if ΔY remains unchanged, then the intrinsic value of the position will not change. If ΔY is a positive number, then the intrinsic value of the position will increase, and vice versa. In addition, for delivery contracts, the basis is generally negative in the initial state, and will gradually become 0 by the delivery date (regardless of transaction friction), which means that ΔY must be a positive number, so if the synthesis The basis is Y. The value of the synthetic position on the delivery date will be higher than the initial position.
The asset portfolio of holding spot and shorting futures is also called spot arbitrage. This arbitrage structure itself is risk-free (but there are external risks). According to current data, constructing this kind of investment portfolio can earn about 18%. low-risk annualized returns.
Let’s go back to Ethena. I didn’t find an accurate definition on the official website about whether to use delivery contracts or perpetual contracts (considering the depth of transactions, the probability of perpetual contracts is relatively high), but the on-chain address of the collateral and CEX distribution were announced. .
In the short term, there will be some differences between the two methods. The delivery contract will provide a more stable and predictable rate of return, and the return to maturity will always be positive. The perpetual contract is a product with fluctuating interest rates, and the daily interest rate may also be negative under certain circumstances. But from experience, the historical arbitrage return of the perpetual contract will be slightly higher than that of the delivery contract, and both are positive:
The essence of Delta-neutral futures airdrop is to lend funds. Lending funds cannot maintain 0 or negative interest rates for a long time, and this kind of position is stacked with USDT risks and centralized exchange risks, soRequired rate of return > Risk-free rate of return in U.S. dollars。
Perpetual contracts are subject to variable yields to maturity and require the payment of additional risk premiums.
Based on this, worrying about “USDe” being insolvent or analogizing USDe to UST is simply wrong.According to the collateral risk assessment framework introduced at the beginning of the article, USDe’s current core/narrow mortgage coefficient is 101.62%. After taking into account ENA’s circulating market value of US$1.57 billion, the broad mortgage coefficient can reach approximately 178%.
[Potential negative rates will cause USDe collateral to shrink]Not a big problem either. According to the theorem of large numbers, as long as time is long enough, frequency will inevitably converge to probability, and USDe collateral will maintain a growth rate that converges on the average funding rate in the long term.
To put it in simpler terms: You can draw one card from the deck an unlimited number of times, and you lose $1 if you draw the king or king, and you make $1 if you draw the other 52 cards. With a stake of $100, do you need to worry about going bankrupt because you draw too many kings and kings? It is more intuitive to look at the data directly. In the past 6 months, the average contract rate has only been below 0% twice, and the historical winning rate of spot arbitrage is much higher than that of poker.
Where are the real risks?
market capacity risk
Now we have established that collateral risk is not something to worry about. But that doesnt mean there arent other risks. Of greatest concern is the potential limit on Ethena’s contract market capacity.
The first risk is liquidity risk. The current issuance of USDe is approximately US$2.04 billion, of which ETH and LST total approximately US$1.24 billion. This means that under complete hedging, a short position of US$1.24 billion needs to be opened. The required position size is proportional to the size of USDe.
Binances current ETH perpetual contract position is approximately US$3 billion, and 78% of Ethenas USDT reserves are stored in Binance. Assuming that the utilization of funds is even, this means that Ethena needs to open 2.04 billion * 61% * 78 on Binance. % = short positions with a nominal value of 970 million, accounting for 32.3% of open positions.
If Ethenas position size is too high on Binance or other derivatives exchanges, it will have many negative impacts, including:
May lead to greater transaction friction
Unable to cope with large-scale redemptions in a short period of time
USDe pushes up the supply of short positions, leading to a drop in fees and affecting yields
Although risks may be mitigated through some mechanical design, such as setting time-based minting/burning caps and dynamic rates (LUNA introduced this mechanism), it is better not to put yourself at risk.
According to these data, the market capacity that the combination of Binance + ETH trading pairs can provide for Ethena is very close to the limit. But this limit can also be exceeded by introducing multiple currencies and multiple exchanges. According to Tokeninsight data, Binance occupies 50.1% of the derivatives trading market. According to Coinglass data, in addition to ETH, the total contract holdings of the Top 10 currencies on Binance are approximately three times that of ETH. It is estimated based on these two data:
Theoretical upper limit of USDe market capacity = 20.4 (628/800) * 60% / 4 / 50.1% = 12.8 billion US dollars
The bad news is that USDe has a capacity cap, but the good news is that there is still 500% room for growth before the cap.
Based on these two upper limits, we can divide the scale growth of USDe into three stages:
0-2 billion: Achieve this scale through the market for ETH on Binance
2 billion-12.8 billion: It is necessary to expand the collateral to mainstream coins with higher market depth + fully utilize the market capacity of other exchanges
More than 12.8 billion: Need to rely on the growth of the Crypto market itself + the introduction of additional collateral management methods (such as RWA, lending market positions)
It should be noted that if USDe wants to truly flip the centralized stablecoin, it must at least surpass USDC to become the second largest stablecoin. The latter’s current total issuance is about 34.6 billion US dollars, which is 2.7 times the potential capacity limit of USDe’s second phase. , will be a relatively big challenge.
Custody risk
Another controversial point of Ethena is that the funds of the agreement are held in escrow by a third party. This is a compromise based on the current market environment. Coinglass data shows that dydx’s total BTC contract holdings are US$119 million, only 1.48% of Binance’s and 2.4% of Bybit’s. So managing positions through centralized exchanges is inevitable for Ethena.
However, it should be pointed out that Ethena adopts the Off-Exchange Settlement hosting method. Simply put, the funds managed in this way will not actually enter the exchange, but will be transferred to a special address for management, usually jointly managed by the principal (i.e. Ethena), the custodian (third-party custodian) and the exchange. , at the same time, the exchange generates corresponding quotas in the exchange based on the scale of the custody funds. These funds can only be used for transactions and cannot be transferred; they will be settled according to the profit and loss afterwards.
The biggest advantage of this mechanism is precisely [eliminating the single point risk of centralized exchanges], because the exchange never really controls the funds and requires the signature of at least 2 of the 3 parties before it can be transferred. On the premise that the custodian institution is credible, this mechanism can effectively avoid exchange RUG (such as FTX) and project party RUG. In addition to Copper, Ceffu, and Cobo listed by Ethena, Sinohope and Fireblocks also provide similar services.
Of course, there is also the theoretical possibility of custodial institutions doing evil, but based on the current background that CEX still occupies absolute dominance + on-chain security incidents occur frequently, this kind of semi-centralization is a local optimal solution, not the final form. But after all, APY is not free. The key is whether you should bear these risks in order to improve profits and efficiency.
Interest rate sustainability risk
USDe needs to be pledged to obtain income. Since the pledge rate will not be 100%, the rate of return of sUSDe will be higher than the derivatives rate. Currently, the USDe pledged in the contract is about 470 million US dollars, and the pledge rate is only about 23%. , the nominal APY of 37.1% corresponds to the underlying asset APY of about 8.5%.
The current ETH pledge yield is about 3%, while the average funding rate in the past three years is about 6-7%. The 8.5% underlying asset APY is completely sustainable, and whether the 37.1% sUSDe APY can be sustained will also depend on Are there enough applications that commonly carry USDe to reduce the pledge rate and bring higher returns?
Other risks
Including contract risks, liquidation and ADL risks, operational risks, exchange risks, etc. Given by Ethena and Chaos LabsMore details。
