Blockworks Advisory Reelection Intent
As our second six-month term on Ethena’s Risk Committee comes to a close, Blockworks Advisory remains committed to contributing meaningfully to the protocol’s long-term success. We’ve approached this role with a focus on clarity, objectivity, and a data-driven mindset, ensuring our input helps shape sound, forward-looking decisions.
We believe that in a rapidly evolving ecosystem like Ethena’s, building structured yet flexible frameworks is key to managing risk effectively. With no established playbook for what lies ahead, the work of the Risk Committee is as much about setting durable standards as it is about responding to a dynamic environment. This belief has shaped our contributions across key initiatives, several of which are highlighted below.
Over the course of this term, responsibilities have become more defined, and we’ve established ourselves as a key contributor across several working groups and subcommittees within Ethena’s governance, as evidenced by our published analyses and ongoing collaboration with other active participants. Early in the term, we also introduced the first monthly governance update, which highlights notable developments across the Ethena ecosystem and recaps the Risk Committee’s recent efforts to keep the community informed and up to date.
Onboarding new assets
Effective risk management is inseparable from sustainable growth, especially for a product like USDe, where the hedging strategy is core to its design. As USDe scales, its backing must also grow in both size and diversification. This makes it critical to continuously explore new venues and backing assets to preserve performance and manage risk dynamically.
With this in mind, one of our first priorities was to help develop a framework for evaluating and onboarding new collateral assets. When Ethena Labs proposed adding SOL as a backing asset for USDe, mirroring the mechanics already used with ETH and BTC, Blockworks Advisory supported the initiative. We viewed Solana as a compelling addition due to its deep liquidity, ecosystem maturity, and strong revenue potential. At the time of the proposal, SOL was the fourth-largest non-stable crypto asset by market cap, behind only BTC, ETH, and BNB. Integrating SOL was a strategic step toward expanding USDe’s yield surface, reducing concentration risk, and bolstering long-term stability.
Key considerations we’ve established as a framework for asset evaluation (further described here)
- Liquidity and Availability – Ensuring exchanges offer sufficient liquidity for favorable funding rates, particularly during market volatility, to support efficient hedging.
- Volatility and Funding Rates – Evaluating the asset’s volatility and its impact on funding rates and hedging costs to maintain profitability.
- Liquidation Risks – Managing exposure limits to mitigate the risk of liquidation, especially for derivative instruments like liquid staking tokens (LSTs).
- Exit and Rebalancing Strategies – Defining clear criteria for adjusting or unwinding positions if market conditions make them unviable.
Funding Rate Analysis
Building on our initial framing, we took the lead on one of the core issues, funding rates, by presenting a detailed analysis to support the decision-making process. To facilitate a more informed evaluation of venues and assets that is consistent and unbiased, we developed a novel framework for assessing funding rate distributions in the context of Ethena. This framework incorporates a comprehensive statistical analysis of historical funding rates, including autocorrelation analysis to measure predictability and, crucially, extreme event duration analysis to assess risk exposure. Further details on our analysis and key findings for SOL can be found here.
New Types of Assets
More recently, Ethena integrated liquid stables as a core component of USDe’s backing, providing a sizable buffer for redemptions and introducing an additional yield source when basis trades become less attractive. The addition of USDtb and sUSDS marked a shift toward yield-bearing, low-risk, and highly liquid assets within the backing framework. In this context, two key proposals emerged: one to supply USDtb, and another to deploy USDC and USDT from USDe’s backing into Aave. We delivered in-depth analyses for both, and coordinated closely with committee members to produce a unified response from the Risk Committee.
Blockworks Advisory conducted a comprehensive risk analysis on integrating Aave’s aUSDC and aUSDT markets into USDe’s backing framework. We evaluated key risks, including peg stability, redemption dynamics, market insolvency, and governance exposure, while also analyzing expected yields relative to risk-minimized benchmarks. Based on our findings, we proposed supply caps, a minimum yield threshold, and an active management strategy to safeguard liquidity and maintain capital efficiency. The recommendations aim to strike a balance between maximizing yield and preserving the safety and redemption capacity of Ethena’s USDe. A similar analysis was conducted for the integration of USDtb, with a focus on specific risks such as potential supply cyclicality driven by the anticipated increase in looping between USDtb and sUSDe.
Onboarding new venues
Supporting Ethena’s growth means expanding hedging venues in a safe and scalable way. In response to the proposal to onboard Hyperliquid, Blockworks Advisory outlined four core criteria to guide a repeatable framework for evaluating future venues.
Key considerations we’ve established as a framework for venue evaluation (further described here)
- Security – The exchange must have a robust history of security, including regular and up-to-date smart contract audits by top-tier, reputable audit firms.
- Open Interest – The exchange should offer sufficiently large open interest to ensure Ethena’s positions remain a small portion of the total, avoiding any market-moving impact or liquidity concerns.
- Funding Rates – Funding rates must align with those offered on centralized exchanges currently used by Ethena, particularly avoiding lower funding rates.
- Legal and Regulatory Compliance – A thorough legal due diligence process should be conducted and verified by the Ethena Foundation to ensure the exchange operates within acceptable regulatory frameworks.
The application of this full framework to Derive would be premature, as its open interest at the time of the proposal was too low to justify a meaningful evaluation of other key factors. Considerations to this proposal can be found here. Since funding rates are closely tied to open interest levels, conducting a meaningful analysis should only occur once a minimum threshold is met. This led to internal discussions concerning how this minimum threshold should be derived.
Recently, we applied this framework to Coinbase INTX. While Coinbase offers lower median funding rates, especially for ETH, making it less appealing for basis trade profitability alone, its unique smoothing mechanism results in highly stable and predictable funding, significantly reducing the risk of negative carry. Whitelisting Coinbase enhances Ethena’s hedging framework by diversifying counterparty risk and giving the trading team flexibility to rotate capital across venues as funding conditions shift. With open interest rising sharply, its strategic importance is growing, making it timely to establish whitelisting and infrastructure now.
In the background, we also analyzed other exchanges to assess their viability for potential inclusion as future trading venues for Ethena.
Reserve Fund management
Onboard RWA backing
One key contribution to Ethena’s risk management involved conducting thorough due diligence, analysis, and recommendations for selecting RWAs for the Reserve Fund during the first term. Blockworks Advisory meticulously reviewed all proposals, researched the protocols and their teams, and assessed associated risks. Taking a leadership role, we facilitated discussions to determine the most suitable protocols for Ethena, providing a structured framework and well-defined selection criteria for other Risk Committee members to use. This comprehensive effort ultimately resulted in the announcement of the selected products, which can be found here.
USDtb as a USDe Backing Asset and Eligible Asset for the Reserve Fund
The previous analysis of RWAs enabled us to confidently endorse USDtb as both a USDe backing asset and an eligible asset for the Reserve Fund in Ethena Labs’ latest proposal. Additional insights and considerations are available here.
Reserve Fund sizing
By gaining a deep understanding of Ethena’s competitive landscape and the need to maintain a robust risk posture, we helped determine the growth parameters for the ENA fee switch. Through market analysis and strategic growth discussions, we provided recommendations that align with Ethena’s long-term goals. Most importantly, we helped define the critical risk parameters required for an effective fee switch, which are detailed here.
A key focus of our discussions has been determining the appropriate sizing of the Reserve Fund. As revenue distributions are to begin after the Reserve Fund reaches a sufficient capitalization level, since the approval of the fee switch our efforts have been dedicated to defining what constitutes “sufficient” capitalization.
A dedicated working group, composed of Blockworks Advisory and Llama Risk, has been formed to explore various approaches and potential improvements. We are committed to continuously contributing to this group to develop a comprehensive framework that incorporates diverse perspectives and inputs. Currently, our approach leverages a direct two-cost framework, incorporating dynamic funding rate estimations and refined slippage assumptions to ensure a realistic and robust fund that can keep Ethena safe during extreme downturns. The details of our current methodology can be found in our working document here.
Monthly Reserve Fund Updates
The working group recently began publishing monthly reserve fund updates proactively (June and July), using multiple models to assess how much capital should be allocated to the reserve fund under different scenarios. The goal of these reports is to determine whether any action is needed to top up the reserve or if it remains adequately capitalized. Importantly, reserve fund requirements can shift significantly based on the composition of USDe’s backing, even if total circulating supply remains unchanged. For instance, when market conditions favor the basis trade, a larger share of the backing is allocated to hedging positions, increasing potential loss exposure and thus reserve requirements. Conversely, if conditions change and the backing tilts toward stablecoins, capital needs decline. To give the trading team the flexibility to rotate across yield sources efficiently, the reserve fund must be monitored closely, and that’s precisely the purpose of these monthly updates.
Before the monthly updates were introduced, a proposal was brought forward to allocate a portion of excess reserve fund assets to USDe’s backing. We thoroughly analyzed this through simulations to understand its potential impact. The introduction of monthly updates now provides a more structured framework for evaluating reserve fund needs on an ongoing basis.
Future Work
Looking ahead, Blockworks Advisory is focused on refining and building upon the foundational frameworks we’ve helped establish, particularly those guiding the onboarding of new exchanges and parametrizing new integrations. These frameworks are critical to ensuring that USDe can scale safely and integrate more deeply across the DeFi landscape.
Another ongoing priority is Reserve Fund sizing, which we see as a key pillar of Ethena’s overall risk management and a necessary tool to support sustainable USDe growth. Alongside these efforts, we’ll continue to provide responsive, hands-on support wherever needed, just as we have throughout this term.
We’re excited to continue working closely with the Risk Committee and contributing to Ethena’s long-term success.