Introduction
Following the recent wallet hack at Bybit, the market quickly adjusted the risk pricing for Ethena’s protocol. Specifically, the secondary market prices for sUSDe and USDe were affected due to approximately 20% of the USDe collateral backing being allocated to perpetual positions on Bybit’s CEX. However, market concerns subsided shortly after Ethena Labs confirmed the protocol remained unimpacted.
This write-up revisits Ethena’s structural setup and elaborates on the risk mitigation mechanisms that protect its operations, even during tail-risk events. Although the protocol’s operations involve centralized actors, Ethena dedicates significant attention to diversifying and minimizing external centralization risks.
Ethena’s CEX Risk Mitigation
Off-Exchange Settlement
USDe’s yield arises primarily from the perpetual futures funding rate returns. To generate these returns, Ethena holds volatile assets and simultaneously opens a short perpetual position on the same notional size on various exchanges. The choice of exchange depends on the available Open Interest (OI), and Ethena currently uses four CEXs: Binance, Bybit, OKX, and Deribit.
Source: LlamaRisk’s Ethena Risk Dashboard, February 23rd, 2025
Importantly, the collateral is not held directly on these exchanges but is allocated through intermediaries called custodians. This approach is supplemented by bankruptcy-remote custodial structures, which separate the exchange’s solvency risk from that of Ethena’s protocol.
Below is a visual representation of the asset flow within Ethena’s system:
Source: LlamaRisk, February 23rd, 2025
Key protocol mechanisms include:
- USDe Minting & Redemption: Only whitelisted minters interact with the USDe Mint/Redeem Contract to mint USDe using USDT as collateral. Redemptions are available exclusively to whitelisted entities and only in USDT, subject to availability.
- Collateral Reception: Ethena receives collateral, which it may hold as stablecoins or delegate to selected centralized exchanges via custodians.
- Collateral Allocation: Ethena directs the collateral among different CEXs. It can initiate asset swaps (BTC, ETH, ETH LSTs, SOL) or open/close perpetual positions.
- Revenue Accrual: Revenue from funding rates is redeemed from the CEXs as stablecoins and then distributed to the sUSDe Staking Contract as newly minted USDe.
- Unstaking Process: sUSDe holders initiate unstaking; after a 7-day cooldown, they can redeem sUSDe for underlying USDe at a defined internal rate.
- Reserve Fund Allocation: A portion of the weekly revenues is allocated to a reserve fund in yield-bearing stablecoins. This fund serves to cover any USDe collateral losses or to support the secondary market peg during periods of stress.
Use of Custodians
Ethena employs Copper, Ceffu, and Cobo as custodial providers. These custodians hold portions of the USDe backing collateral and are responsible for the on-demand delegation of assets to CEXs. This indirect delegation ensures that assets are never re-hypothecated and remain fully under Ethena’s control.
Monthly custodian attestations report the asset types and total value under custody:
Source: Ethena’s Monthly Custodian Attestation, February 23rd, 2025
From a legal perspective, funds held by custodians are part of a bankruptcy-remote trust. This means that in the event of a custodian failure, user funds remain protected. In addition, exchanges post collateral with custodians prior to trading to ensure timely PnL settlements—even if an exchange initially refuses to settle. Ethena also reserves the right to dispute any erroneous settlement requests.
Off-exchange settlement keeps Ethena’s crypto assets outside centralized exchange custody while still permitting active trading. This structure mitigates counterparty risk and limits exposure to insolvency, fraud, and performance risks.
Custodians’ roles in administering their Off-Exchange settlement products include both the safe custody of assets and the enforcement of the terms of the Off-Exchange settlement legal agreement. This means that, in the event of an erroneous settlement request from an exchange or an insolvency event at the exchange, the Off-Exchange settlement provider will enforce the underpinning legal agreement both operationally and technically. Based on the information at hand, we have every reason to believe that Ethena not only keeps its USDe backing assets out of centralized exchanges but also adheres to best security practices in its arrangements with custodians.
Overall Risk Exposure
While off-exchange settlement reduces the solvency risk associated with exchanges, it introduces custodial risks. Any disruption in depositing, withdrawing, or delegating funds to exchanges can impact trading workflows and USDe minting/redemption. However, such issues do not affect the value of the assets backing USDe.
Ethena mitigates these risks by actively managing unrealized PnL with exchanges. For example, Copper’s Clearloop facilitates settlements on a 2-, 4-, 8-, or 24-hour cadence, reducing the accumulation of large outstanding balances.
While large-scale crypto custodians have not experienced significant operational failures or insolvencies, the possibility remains. A custodian’s insolvency could present operational challenges for the creation and redemption of USDe, requiring Ethena to transfer assets to alternative providers. However, the backing assets within these solutions are not owned by the custodian, nor are they subject to legal claims from the custodian or its creditors. This is due to OES providers utilizing bankruptcy-remote trusts, ensuring asset security.
At the time of Bybit’s wallet hack, Ethena had approximately ~$30m in unrealized PnL on Bybit—a figure quickly reduced to zero to eliminate direct exposure. This $30m represented only the unsettled portion of the USDe collateral, backed by additional reserves and future distributions to the sUSDe Staking Contract.
Over-collateralization
USDe is over-collateralized by means of the reserve fund, which safeguards against losses from negative perpetual funding rates and operational risks such as unsettled PnL. Ethena’s risk providers, including LlamaRisk, assess the necessary risk coverage and recommend appropriate reserve fund levels. Currently, a reserve fund capital of $60m is maintained according to our reserve fund methodology. This allocation is adjusted with changing market conditions and the growth of Ethena’s protocol.
Redemptions
During market stress, Ethena successfully serviced over $120m in USDe redemptions using a substantial stablecoin buffer within the collateral. The high volume of redemptions led to significant unstaking requests, with an expected $250m release from USDe approximately 7 days after these requests. Ethena’s robust stablecoin buffer, currently at $1.9b, is well-positioned to meet these redemption demands.
Source: LlamaRisk’s Ethena Risk Dashboard, February 23rd, 2025