Chaos Labs supports listing USDe in Isolation Mode on Aave V3 Ethereum. Following is our analysis and risk parameter recommendations for the initial listing.
Note: The following analysis is conducted solely from a market risk viewpoint, excluding centralization and third-party risk considerations. We provide insights into these components; however, if the community aims to reduce exposure to USDe, adopting a more conservative supply cap or debt ceiling should be considered.
We have previously provided recommendations for listing sUSDe, the staked version of USDe. USDe is an asset minted using BTC, ETH, ETH LSTs, and USDT. Collateral is then hedged on centralized exchanges, generating yield when funding rates are positive. However, this yield does not accrue to USDe, instead accruing to sUSDe in a similar manner as wstETH. There is a 7-day cooldown when unstaking sUSDe; there is no cooldown to redeem USDe, though a multi-sig controlled by Ethena can set max redemptions per block. Thus USDe functions largely the same as overcollateralized stablecoins, albeit with additional complexities and risks outlined below.
When analyzing market cap and trading volumes of assets for listing, we look at data from the past 180 days. Alongside a speculative “shard-based” incentive structure, Ethena’s TVL grew rapidly from January to April, reaching a high of $2.4 billion, while USDe has averaged $57.88 million in daily volume. Bybit recently announced that it will incorporate USDe as a collateral asset, which may further increase its market cap and daily volume.
USDe’s rapid growth and integration thus calls for a more conservative listing approach, as incentivized growth can potentially give way to rapid liquidity drawdowns in the future.
Considering the volatility and the correlation of USDe to USD, we recommend setting the LT to 75%. This mirrors such as sDAI and traditional stablecoins on Ethereum V3, albeit with a slight adjustment to account for the smaller liquidity and the asset's relative novelty. Consequently, there might be slightly more variance expected in the future.
Chaos Labs’ methodology for initial supply caps generally suggests establishing the Supply Cap at twice the liquidity available based on the Liquidation Penalty price impact. However, given ongoing incentives to liquidity providers on DEXes, we recommend beginning with a more conservative cap (equal to the liquidity available based on Liquidation Penalty price impact) than would usually be recommended, given the possibility that liquidity decreases once these incentives end.
Given the current DEX liquidity profile of USDe, we recommend a supply cap of 80M USDe.
Considering the size of the insurance fund and the anticipated utilization through stablecoin looping, our initial recommendation is to list sUSDe in isolation mode with a debt ceiling set at $40 million. Further insights into the projected growth of the insurance fund are provided in our comprehensive analysis of DAI post-D3M integration with Ethena.
We recommend pricing USDe according to its market price, which serves as a proxy for its implied collateralization ratio, alongside an expected-price-CAPO upper value of 4% (thus establishing a price maximum of $1.04) to deter potential oracle manipulation. This approach accounts for the ability to atomically redeem USDe for its underlying equivalent in case of insurance fund depletion, as in expectation the market price will not deviate further from this point.