First concern was why do they need a new stablecoin in the first place? Wasn’t clear on this.
Looking at the their webpage and GitHub overview, there are a lot of functions that seem to give Ethena Labs god-control over the protocol. Such as the Gatekeeper role which can remove mint/redeem functionality. These roles appear to be in place to protect against bad actors or hacks but presence raises concern for abuse.
Process appears to be deposit ETH and Ethena gives you USDe, which you can stake to get sUSDe which gives 27% yield. Unstaking cooldown for sUSDe is 14 days (configurable to 90 days; configuration seems subject to change at whim of Ethena with no notice or notification, also a concern).
So in case of fire, if had sUSDe, you can unstake…and hope to get USDe back in 2 weeks. At which point you hope things haven’t gotten so frothy that the protocol Gatekeepers (whoever they may be) didn’t decide to turn off the Redeem function which allows you to convert USDe back into ETH. Which would trap your ETH and stETH in the protocol.
Why would a fire exit need a portcullis? Seems ominous. Wonder if there’s a liquid secondary market to swap out of sUSDe?
Thank you! That’s really good to know. This is my paranoid side talking: an unscrupulous Ethena gatekeeper(s) could throw a scare by locking the redeem function. Then hoover up the USDe in the LPs at a discount as everyone tries desperately to unload their tokens on a secondary market. Then once they have a stack of USDe, flip the redeem back on (whoops false alarm sorry guys lol), redeem USDe at par and zip out with a pile of ETH.
Well you just never know! IMO you're thinking about this the right way, no doubt the result of careful study. Yes most protocols will pump in a bull market, but the products we actually want to use should be as decentralized as possible. No need to trust intermediaries.
btw if you think 27% is adequate reward for basis farming, you might think ~50% is adequate for taking on market making risk and just stay in the HLP vault, much of its earnings comes from funding rates (the LP is usually net short in a bull)
I haven't heard about HLP since your last article but I do check on Hyperliquid once a while. Looks like the profits are picking up again on volatility.
Guess what? I left a very small amount of USDC in the vault for about 4 weeks now and it is earning me some income (and some points) since 2 weeks ago. Not a crypto short term trader myself but I like the idea of having a share in a winning trading system.
I noted that Hyperliquid has been adding a lot of popular coins and this means more market making profits. I would appreciate if you can share your view on HLP and if the HLP's vault rewards (vs platform/smart contract risks) are still favorable?
Yes, still favorable, APYs still juicy > 60%, rewards paid in USDC which is great, and although in my wallets I didn't get many points for staking in HLP it is a small bonus.
I just pulled mine because I have more lucrative stuff elsewhere and capital efficiency really important but for most people its still one of the best farms.
The stablecoin tokenizes the investment strategy, so it's composable with other parts of DeFi.
Yes, it's a very early stage project in terms of decentralization, we would expect the centralized control / guardrails to be removed or decentralized over time. The team have expressed a wish to do so in the documentation, citing regulatory concerns and the lack of remuneration for operating the protocol as incentives.
Not against the product or even against farming it if you understand the risks, just need to be out before any major crisis. In the meantime, people will probably make a lot of money farming this and looping borrows to leverage farm when the token is accepted as collateral in money markets.
100% agree. Followup query would be approach to risk management…no doubt people will ape in and make $ initially. But how exactly does one ensure one can get out before a major crisis? Especially when there is an unstaking time delay in place.
As shown in the Terra/Luna incident, once things go down they can go down by 90%+ in a day.
Therefore imagine the idea of having notifications for news regarding Ethena wouldn’t necessarily help. Since even immediate action just puts one into a 2 week queue of unstakers awaiting the gatekeepers’ wave past.
So am guessing one has to synthesize one’s own fire exit?
Once its listed on Aave or wherever it may be a good trade, if you can time the trouble, to borrow the coin and swap for another stable, essentially shorting it, then cover in the depeg.
I audited the Ethena protocol a few months back. Definitely a cool idea. Not really something I'd risk my capital on though, especially for such a "small" return. Thanks for the writeup.
how relevant will chainlink stay after the ethereum dencun upgrade(march 13th)?
If I understood correctly Ethereum is gonna have their own "decentralized" oracles...
Any Thoughts? would really appreciate some sanity check
((My first comment here, I should've said long ago how much I appreciate the deep dives you guys do, always a big pleasure to read your articles, please keep it up))
What an interesting article and concept.
First concern was why do they need a new stablecoin in the first place? Wasn’t clear on this.
Looking at the their webpage and GitHub overview, there are a lot of functions that seem to give Ethena Labs god-control over the protocol. Such as the Gatekeeper role which can remove mint/redeem functionality. These roles appear to be in place to protect against bad actors or hacks but presence raises concern for abuse.
Process appears to be deposit ETH and Ethena gives you USDe, which you can stake to get sUSDe which gives 27% yield. Unstaking cooldown for sUSDe is 14 days (configurable to 90 days; configuration seems subject to change at whim of Ethena with no notice or notification, also a concern).
So in case of fire, if had sUSDe, you can unstake…and hope to get USDe back in 2 weeks. At which point you hope things haven’t gotten so frothy that the protocol Gatekeepers (whoever they may be) didn’t decide to turn off the Redeem function which allows you to convert USDe back into ETH. Which would trap your ETH and stETH in the protocol.
Why would a fire exit need a portcullis? Seems ominous. Wonder if there’s a liquid secondary market to swap out of sUSDe?
> Wonder if there’s a liquid secondary market to swap out of sUSDe?
There's $85M of locked Curve LP tokens into protocol (it yields 20x Shards / Day) and it also has 7 days cooldown period: https://curve.fi/#/ethereum/pools?search=USDe
So that's the current fast exit door and LPs carry the biggest risk here.
What's cool it's going to cause more arbitrage opportunities and huge dislocations of capital at some point. Chaos is opportunity. :)
As described in the article, smart (or degen!) players can create such delta neutral by themself with much bigger flexibility and risk control, for more examples see: https://defillama.com/yields/strategyLongShort?token=ETH
Or see recent airdrop opportunity here a few posts ago.
Thank you! That’s really good to know. This is my paranoid side talking: an unscrupulous Ethena gatekeeper(s) could throw a scare by locking the redeem function. Then hoover up the USDe in the LPs at a discount as everyone tries desperately to unload their tokens on a secondary market. Then once they have a stack of USDe, flip the redeem back on (whoops false alarm sorry guys lol), redeem USDe at par and zip out with a pile of ETH.
Well you just never know! IMO you're thinking about this the right way, no doubt the result of careful study. Yes most protocols will pump in a bull market, but the products we actually want to use should be as decentralized as possible. No need to trust intermediaries.
btw if you think 27% is adequate reward for basis farming, you might think ~50% is adequate for taking on market making risk and just stay in the HLP vault, much of its earnings comes from funding rates (the LP is usually net short in a bull)
I haven't heard about HLP since your last article but I do check on Hyperliquid once a while. Looks like the profits are picking up again on volatility.
Guess what? I left a very small amount of USDC in the vault for about 4 weeks now and it is earning me some income (and some points) since 2 weeks ago. Not a crypto short term trader myself but I like the idea of having a share in a winning trading system.
I noted that Hyperliquid has been adding a lot of popular coins and this means more market making profits. I would appreciate if you can share your view on HLP and if the HLP's vault rewards (vs platform/smart contract risks) are still favorable?
Yes, still favorable, APYs still juicy > 60%, rewards paid in USDC which is great, and although in my wallets I didn't get many points for staking in HLP it is a small bonus.
I just pulled mine because I have more lucrative stuff elsewhere and capital efficiency really important but for most people its still one of the best farms.
Thank you, that is what I thought too. I’m quite new to farming yield so your risk analysis are very valuable lessons for me.
The stablecoin tokenizes the investment strategy, so it's composable with other parts of DeFi.
Yes, it's a very early stage project in terms of decentralization, we would expect the centralized control / guardrails to be removed or decentralized over time. The team have expressed a wish to do so in the documentation, citing regulatory concerns and the lack of remuneration for operating the protocol as incentives.
Not against the product or even against farming it if you understand the risks, just need to be out before any major crisis. In the meantime, people will probably make a lot of money farming this and looping borrows to leverage farm when the token is accepted as collateral in money markets.
100% agree. Followup query would be approach to risk management…no doubt people will ape in and make $ initially. But how exactly does one ensure one can get out before a major crisis? Especially when there is an unstaking time delay in place.
As shown in the Terra/Luna incident, once things go down they can go down by 90%+ in a day.
Therefore imagine the idea of having notifications for news regarding Ethena wouldn’t necessarily help. Since even immediate action just puts one into a 2 week queue of unstakers awaiting the gatekeepers’ wave past.
So am guessing one has to synthesize one’s own fire exit?
Once its listed on Aave or wherever it may be a good trade, if you can time the trouble, to borrow the coin and swap for another stable, essentially shorting it, then cover in the depeg.
Excellent point(s) here!
So are you guys going to use it for some time while it's still new?
I am not because 27% isn't interesting to me. But people will use it and make money. Especially on the looped/levered up version when it's live.
Excellent writeup
I audited the Ethena protocol a few months back. Definitely a cool idea. Not really something I'd risk my capital on though, especially for such a "small" return. Thanks for the writeup.
Oh that's interesting, thanks for sharing!
I wouldn't be a want-to-be degen if I didn't ask for an airdrop code, so.....
((got a question unrelated to this topic:))
how relevant will chainlink stay after the ethereum dencun upgrade(march 13th)?
If I understood correctly Ethereum is gonna have their own "decentralized" oracles...
Any Thoughts? would really appreciate some sanity check
((My first comment here, I should've said long ago how much I appreciate the deep dives you guys do, always a big pleasure to read your articles, please keep it up))