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Ethena Labs Proposes Using Reserve Assets to Buy Back USDe in Secondary Market Price Dislocations
Summary: According to Ethena Labs Research, Ethena Labs has recently proposed a new mechanism to buy back and burn USDe in the secondary market when the price significantly deviates from its pegged value, aiming to support orderly market liquidity and stability. The proposal is a risk management response to the extreme market volatility on October 10th ...
According to Ethena Labs Research, Ethena Labs has recently proposed a new mechanism to buy back and burn USDe in the secondary market when the price significantly deviates from its pegged value, aiming to support orderly market liquidity and stability. The proposal is a risk management response to the extreme market volatility on October 10th when the USDe price briefly plummeted to $0.65 on Binance exchange.
Core Mechanism
Buyback Conditions: Only activated during 'severe market dislocations,' with an initial price threshold set at USDe trading below $0.99.
Funding Source: Utilizing stablecoins available in the existing USDe reserves, such as USDT.
Amount: Planning to use 1.2% of the total USDe reserve assets, equivalent to approximately $95 million based on the current USDe supply.
Execution: Buybacks will be conducted through centralized exchange (CEX) order books using off-chain solutions, without directly depositing reserve assets into exchanges.
Immediate Burn: The bought-back USDe will be immediately burned.
Protocol Benefits
The net impact of this mechanism will be:
Increased Collateralization: Buying USDe below $1 captures the price difference, increasing protocol reserves and raising USDe's collateralization.
Supply Reduction: Burning USDe decreases its circulating supply.
Price Support: Providing buy-side support directly in the secondary market stabilizes USDe prices under market pressure.
Gas Fee Mitigation: Ethena can cover high gas fees using captured spreads, ensuring arbitrage operations even during network congestion, addressing one of the reasons market makers were restricted on October 10th.
Background
During the market volatility on October 10th, despite Ethena's core mint/redeem functions operating normally and processing over $2 billion in instant redemptions within 24 hours, the lack of direct USDe mint/redeem integration on Binance and issues faced by traders on CEX led to severe price dislocation of USDe/USDT on Binance. This proposal aims to actively intervene in the secondary market to prevent 'cyclical loop of USDe liquidations' effects caused by similar events and bring net gains to the protocol.
The Risk Committee members have received this proposal and will provide recommendations in subsequent meetings.
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